Saudi Arabia scored a big win during the March 4 OPEC+ meeting, which saw members agree to keep production levels steady. But the decision will frustrate central bank governors concerned about rising inflation. OPEC+ decided to leave its overall production levels in April virtually unchanged compared to February and March levels. Russia and Kazakhstan will continue to have a small exemption allowing them to increase their quotas.

• Brent crude oil prices have increased by about 30% since the start of 2021 as demand continued to increase while production levels remain steady. They rose by more than 5% on March 4 to post-pandemic highs on the decision.
• Prior to the March 4 OPEC meeting, leaks indicated that OPEC+ was considering a production increase of about 1.5 million barrels per day.
• Saudi Arabia's voluntary 1 million b/d production cut below its quota levels for February and March will also remain in place for the month of April.

Saudi Arabia and Russia's detente is fragile, and Saudi Arabia will eventually be forced to increase production after April. Global inventories spiked during the height of the pandemic while Saudi Arabia has long backed a policy to try to draw down inventories. Even though some inventories, including that of the United States, have reached five-year seasonal norms, Riyadh still wants to draw down because the five-year average is inflated by the Saudi-Russia price war launched in 2014 that swelled inventories until OPEC+ was formed in late 2016. Russia is becoming increasingly concerned about the impact of higher oil prices on non-OPEC production, particularly in the United States, fearing that higher prices will cause a resumption in shale production. 

• Saudi Arabia has enjoyed backing from Kuwait and the United Arab Emirates, which can afford to restrain production, and Algeria and Nigeria, which don't have any real spare production capacity to boost output.
• According to Energy Information Agency monthly production figures, U.S. crude oil production dropped from a pre-pandemic peak of about 13 million b/d to around 10.4 million b/d in October 2020 due to the price collapse, but by December had recovered to about 11.1 million b/d.

The decision is bullish for oil markets and will strengthen expectations that oil markets — and potentially commodity markets at large — are entering a post-pandemic supercycle to increase oil prices. Even if shale production starts to recover, logistical and investment hurdles could limit how fast that growth can occur and outside of OPEC+ heavyweights like Kuwait, Russia, Saudi Arabia and the United Arab Emirates. Very limited spare capacity can be brought to the market quickly to head off price spikes as demand recovers after the pandemic. Investment into new oil production globally also collapsed in 2020 as international oil companies tightened capex and delayed projects. Iran remains a key uncertainty. Its crude oil exports have collapsed to less than 500,000 b/d under the weight of U.S. sanctions, but could return to pre-sanctions levels of 2.5 million b/d relatively quickly if the United States and Iran can agree on conditions for sanctions relief.

• In late February, Goldman Sachs increased its oil price outlook for Q2 by $10 per barrel to $70 per barrel, and increased its Q3 outlook to $75 per barrel. It is also now expecting oil prices in Q4 and in 2022 to average $70 per barrel; Goldman Sachs joins a growing number of investment banks that have suggested that oil and commodity markets are entering a supercycle. 
• OPEC+ is collectively keeping about 7% of global oil production offline. 
• The International Energy Agency expects oil demand in 2021 to recover about 60% of the pandemic collapse, forecasting oil consumption to increase by 5.4 million b/d to average 96.4 million a day for the year.
• Iran and the United States are struggling to get talks off the ground; if talks do not materialize soon, progress leading to sanctions relief may not occur until after Iran holds presidential elections in June. 

Rising oil prices will compound existing fiscal concerns and exacerbate ongoing economic issues, like rising inflation expectations. Even for most oil-producing countries, a sustained increase can only do so much to address their deep financial problems. Algeria, Angola, Iraq, Nigeria, Oman and a host of other oil-producing countries faced financial challenges even before the pandemic began. While a rise in oil prices to even $75 per barrel will alleviate some of their fiscal challenges, it will not balance their budgets or offset the now seven-year financial challenges they have faced since oil prices collapsed from $100 or more per barrel in 2014. 

• The increase will create space for wealthier oil producers such as Saudi Arabia and Kuwait to continue their long-term fiscal adjustment and diversification strategies, easing the pressure for more aggressive reforms that are politically unpopular and allowing them to back down from some if need be. They are not, however, likely to abandon such plans as energy transition initiatives continue to gain momentum globally. 
• Higher oil and commodity prices will add another major contributor to inflation expectations globally, as bond yields are already rising on the back of increased inflation expectations, particularly in the United States, where a new stimulus package is likely to be passed soon. This will complicate matters for central bank governors who do not want to be forced to tighten monetary policies due to inflation concerns before the global economic recovery is complete. Those expectations were fanned on March 4 when Fed chair Jerome Powell said that inflation levels in the United States above the Fed's 2% target for multiple quarters would not cause long-term expectations to necessarily change. 
• Rising oil prices will also place more pressure on countries that have rolled back fuel subsidies in recent years to increase gasoline and other fuel prices more slowly. This would effectively be reintroducing those subsidies, adding to the financial fragility of governments paying for them or state-owned companies that would be doing so on the government's behalf. On March 1, for example, the National Nigerian Petroleum Corp. announced that it would not raise gasoline prices for March after using the price collapse in 2020 as an opportunity to remove them.