Oil prices have recovered spectacularly from their April plunge, but the world’s major oil exporters are wary of unleashing a surge of output that could wipe out the recent gains and put further pressure on their national budgets.
Those calculations will be on the minds of energy ministers from the Organization of the Petroleum Exporting Countries as well as Russia and other states when they meet Saturday by video conference to discuss the markets. The meeting was announced Friday by OPEC.
On the table will be a tentative plan orchestrated by Saudi Arabia, OPEC’s de facto leader, and Russia, a major exporter, to extend, probably by a month, the agreement reached in April to trim production. The amount was a combined 9.7 million barrels a day, about 10 percent of global daily output in normal times.
The output curbs were set to ease in steps after June under the deal, which the producers wrangled while demand for their crude was in a free fall because of global lockdowns to control the coronavirus pandemic.
Riyadh and Moscow have evidently decided that opening up the spigots in July, even modestly, would be unwise. It is not clear whether the Saudis and their allies, Kuwait and the United Arab Emirates, will continue with the extra 1.2 million barrels a day in trims that they agreed to make for June.
Still, the prospect that the cuts will be extended lifted oil prices on Friday. Brent crude, the international benchmark, was up about 5 percent to about $42 a barrel while West Texas Intermediate, the key American oil, was up more than 4 percent to about $39 a barrel.
Those prices were a major advance from late April, when West Texas Intermediate futures plummeted into negative territory and Brent dipped below $20 a barrel. Prices remain sharply down for the year and well below the levels needed by countries like Saudi Arabia to finance ambitious development projects.
Analysts attribute the recent price surges at a time of global economic weakness to two main factors: Demand is increasing, and OPEC, Russia and producers like the United States and Canada have dialed back large volumes of output. As a result, the oil market, which was flooded with excess crude after air travel came to a near halt and road traffic dwindled, is coming back into balance more rapidly than expected.
IHS Markit, a research firm, estimates that 14 million barrels a day in oil output has been shut off around the world as customers like refiners drastically cut their purchases.
In addition, commodity investors have decided that economic activity is regaining momentum as lockdowns are eased. Friday’s report that U.S. employers hired an additional 2.5 million workers is likely to feed this surge of optimism.
“People want to believe in the positive, whether it is justified or not,” said Amrita Sen, chief oil analyst at Energy Aspects, a market research firm. “Anything OPEC does to extend these cuts, of course, is going to have an impact.”
Analysts warn, though, that prospects for the oil market are likely to remain fragile, with demand difficult to forecast as the number of people infected by the coronavirus continues to grow and new waves of infection cannot be ruled out. This uncertainty is a critical reason Saudi Arabia is moving slowly to adjust production. The Saudis are likely to make moves on a month-to-month basis if not day by day, analysts say.
While demand and supply may be coming into balance, a huge gusher of crude remains in storage tanks and on ships waiting to come back onto the market. In addition, as prices rise, so will the temptation for oil producers inside and outside OPEC to open the taps on wells that they have temporarily shut off. Analysts say this process has already begun in the United States.
“It’s a precarious perch right now,” with so much oil being held off the market, said Bhushan Bahree, senior director at IHS Markit.
In an effort to preserve discipline, Saudi Arabia, which along with Russia has absorbed the largest cuts, has been pressuring other producers, notably Iraq, to comply with their commitments. The Saudis, analysts say, especially want to bring Iraq — the second-largest producer in OPEC after Saudi Arabia — in line. Iraq agreed to cut its daily output by more than a million barrels in April but is instead trimming by an estimated 400,000 barrels, according to IHS Markit. Nigeria and Kazakhstan are also under pressure to comply with agreed cuts.
“A key concern” if Iraq is allowed to keep flouting its OPEC obligations is that “other producers will follow suit and collective compliance will further erode,” wrote analysts at RBC Capital Markets, an investment bank, in a recent note to clients.
The Saudis made holding the meeting and extending the cuts contingent on commitments from Iraq and others not in compliance to play by the rules. The Iraqis appear to have yielded, analysts say, but the temptation to produce more oil will only grow as the world economy improves.