Crude prices surged Thursday after OPEC and its allies agreed to extend most oil output cuts into April, offering small exemptions to Russia and Kazakhstan, after deciding that the demand recovery from the coronavirus pandemic was still fragile despite a recent oil price rally.
OPEC’s leader Saudi Arabia said it would extend its voluntary oil output cut of 1 million barrels per day (bpd), and would decide in coming months when to gradually phase it out.
The news pushed oil prices back toward their highest levels in more than a year with Brent, the global benchmark, trading up five per cent above $67 US a barrel as the market had expected OPEC+ to release more barrels.
The price of West Texas Intermediate, the North American benchmark, also rose, closing at $63.83 US a barrel on Thursday, up $2.55. The price of Western Canada Select climbed to $52.65 US a barrel, up $2.84.
“For Canada, absolutely a net positive event,” Rory Johnston, commodity economist and managing director at Price Street in Toronto, told CBC News.
“All of this just trickles straight through to further cash flows for Canadian oil producers, most of whom are sitting near or at their highest production levels.”
Canadian oil producers got a lift with shares of MEG Energy Corp. surging nearly 10 per cent while Vermilion Energy Inc. rose 5.6 per cent and Cenovus Energy Inc. gained 4.9 per cent.
OPEC+ had cut output by a record 9.7 million bpd last year as demand collapsed due to the pandemic. As of March, it is still withholding about 7 million bpd, or seven per cent of world demand. The voluntary Saudi cut brings the total to about 8 million bpd.
Under Thursday’s deal, Russia was allowed to raise output by 130,000 bpd in April and Kazakhstan by another 20,000 bpd to meet domestic needs.
“Everybody (else) is going to maintain the freeze,” Saudi Energy Minister Prince Abdulaziz bin Salman told a news conference to outline the deal.
He said Saudi Arabia would decide in the next few months when to gradually phase out its 1 million bpd voluntary cut “at our time, at our convenience.”
“We are not in a hurry to bring it forward,” he said.
The Saudi minister and Russian Deputy Prime Minister Alexander Novak, lynchpins in the OPEC+ group, had earlier told OPEC+ ministers the recovery in demand was fragile.
Novak said after the meeting that OPEC+ had to tread cautiously to avoid overheating the market
Russia has been insisting on raising output to avoid prices spiking any further and lending support to shale oil output from the United States, which is not part of OPEC+.
But in February Moscow failed to raise output, despite being allowed to do so by OPEC+, because harsh winter weather hit its production at mature fields. Novak said Moscow needed extra barrels to meet recovering demand at home.
Judith Dwarkin, chief economist at Enverus, an energy data analytics firm, said the cautious approach by OPEC came as a little bit of a surprise, essentially keeping production flat from March through April.
“It’s certainly bullish for prices that at least in this very near term, they are really not bringing back much to the market when, in fact, the market is saying it wants more barrels, if prices are any indication,” Dwarkin, based in Calgary, said in an interview.
Former U.S. President Donald Trump regularly communicated with OPEC+ via Twitter and phone calls asking to pump more to avoid price spikes or less to prevent prices from collapsing.
With U.S. President Joe Biden now in office, analysts have said Washington will play a much less active role in trying to influence OPEC’s policies.
White House Press Secretary Jen Psaki made no direct comment about the OPEC decision when asked on Thursday and instead said the United States was focused on helping Americans through the U.S. economic stimulus package.
Large oil consuming nations, such as India, have already expressed concerned about the recent oil price rally.
The Saudi minister responded on Thursday by saying India should start using oil it had in its inventory bought cheaply during the price collapse last year.