Oil Rally Roils Producer-Consumer Relations

Economic logic dictates that lowest-cost oil producers will survive longest once oil demand peaks, plateaus and starts to decline. In a shrinking market, OPEC low-cost oil producers, mostly operated by state-held national oil companies, should be able to maintain their market share and even expand it as higher-cost competitors falter. But if the volume outlook is broadly positive, OPEC producers’ oil price hawkishness comes at a price. OPEC’s readiness to extend an oil rally that has lifted Brent $15/bbl so far this year (Figure 1) is creating tensions with some of its key strategic customers. Indian government complaints about high oil prices drew a somewhat undiplomatic response this month from Saudi officials, who proposed Indian refiners draw down cheap oil stocks purchased when crude prices were at their 2020 lows. Saudi officials justified its hawkish price stance by pointing out that producers were only now recouping revenue losses incurred last year. Saudi Arabia primed Brent’s rally through its slow and cautious return of output cuts, conservatism it justified by pointing to a raft of uncertainties besetting the global economy. But Riyadh has been less quick to acknowledge that a building headwind to economic recovery post-COVID-19 has been the sharp run-up… continue reading

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