The size of Saudi Arabia’s extreme voluntary production cuts is still being digested by the market and is still fueling the oil price rise.

Single-handedly, Saudi Arabia has helped Brent rise to a fresh new record and break the $55 per barrel mark, a price level not seen since February 2020, when airplanes were still in the sky and the coronavirus was still “novel.”

Our balances confirm the market optimism this week, as with the latest cut in Saudi production and the expected higher compliance from the OPEC block, we see inventories exhibiting continuous draws in crude stocks for nearly every month in 2021.

Stock draws is exactly what Riyadh is after. An extra 1 million bpd in cuts will go a long way in reducing excess crude and products inventories in 1Q21, even as countries are again locking down.

In addition, the extra supply breathing space will help bridge any hiccups in the vaccination roll-out process.

The monthly meetings and surprises from OPEC+ make the future harder to predict, a tool we believe the group will continue to use to its full advantage this year.

OPEC will keep February and March production at around 34 million bpd, if one includes KSA’s 1 million bpd voluntary cut vs. January levels.

The decisions for April allocations are still a lifetime away in the current OPEC-meets-once-a-month-era, as we first need to get through February and March.

However, if OPEC+ were to revert to its previous higher target from April onwards, our balances would suggest a balanced crude market based on a gradual ramp-up to the previous target of 36.3 million bpd plus compliance slippage in the 200,000 bpd to 300,000 bpd range.

OPEC+ knows that should market conditions allow, the group could easily ramp up by 2 million bpd and still keep the market balanced. However, this would go against the previously stated policy of a gradual ramp-up that called for limiting monthly increases to 500,000 bpd per month, the validity of which for now remains a question mark.

There is still a lot of unknowns about the deal.

Usually, Saudi Arabia is good on their word, so we expect them to deliver the promised cut, but at the same time, there has been no official mention in OPEC+ communications or signature on a dotted line.

Another very big unknown is exactly what back-door deals were struck to secure such a gift – promises of better compliance, regional stability, or other political concessions?

1 million barrels per day worth of oil for a 2-month period is not just spare change, and besides a higher price, we wonder what Saudi Arabia is getting besides just political goodwill.

Nevertheless, despite the widespread optimism, the market remains in a fragile state as Covid-19 continues to spread with a speed that triggered a call from the WHO to implement stricter measures around the world.

As people sit at home and consume and commute less, oil demand will struggle to fully recover in 1Q21. Another speedbump in oil demand recovery will be the vaccine roll-out itself, which has already run into distribution snafus.

Last but not least the market seems to brush away the noise from this week’s political turmoil in the US, not trading much on it, and considering Biden’s inauguration a done deal.