High oil prices, global supply issues mean that time is right for OPEC to open the taps again

OPEC is changing course. For the past year-and-a-half, the Organization of the Petroleum Exporting Countries and producers like Russia have diligently stuck to agreed oil supply cuts. Now Russia and Saudi Arabia are discussing opening the taps by an extra 1 million barrels per day, Reuters reported on Friday. It’s more of a reset than a rethink.

The usual problem with cartels is that individual members have an incentive to cheat. Since the cuts were agreed at the end of 2016, OPEC and its supplier friends have had the opposite problem. In April, they restricted output by over 2.4 million barrels per day, more than the agreed level of over 1.7 million barrels. On average, OPEC compliance has been 110 percent of the target, according to the International Energy Agency.

It may seem odd that Saudi Arabia and Russia, whose oil ministers are conferring at the St. Petersburg International Economic Forum, see this as a problem. The combination of their cuts and steady demand has reduced the supply glut in developed markets to normal levels, and pushed oil prices close to $80 a barrel.

Lower costs due to the recent depreciation of the ruble will help state-owned Russian group Rosneft make money hand over fist. Higher prices also prop up the Saudi budget, and support the planned initial public offering of state group Aramco.

Yet far-sighted Russians and Saudis know that pushing the cost of the black stuff to $90 or beyond will be self-defeating. Saudi Arabia will fear annoying US President Donald Trump, who has already tweeted his irritation at OPEC’s role in raising prices. Both countries will also be wary of giving US producers an incentive to crank up production of shale oil.

That is why it’s time to act. Venezuelan output has slumped from 2 million barrels per day in early 2017 to below 1.5 million in April due to underinvestment. Renewed US sanctions on Iran could remove as much as 800,000 barrels per day, ING analysts reckon. Given Saudi alone has 2 million barrels of daily spare capacity, it could fill any gaps, increase its market share and still look like a sober steward of the oil market. In that sense, the change of direction is a nobrainer.