OPEC Plus to boost production slightly
Deal reached as pandemic still pressures demand; talks show strains within group
OPEC and other oil-producing nations headed by Russia, trying to gauge the strength of the global economy as the coronavirus continues to rage but with vaccines on the horizon, reached a compromise Thursday to modestly increase production in January.
But the talks revealed strains in the unwieldy group, known as OPEC Plus, which has tried to manage the oil market since 2016. These tensions could make it more difficult for the producers to stay in line with production targets as the global economy recovers in the coming months.
Under the agreement, members of the Organization of the Petroleum Exporting Countries along with Russia and other countries will increase production by 500,000 barrels a day in January and, potentially, by a similar amount in the following two months. The increase, representing less than 1 percent of the global oil market, comes at a time when demand is still under pressure from the effect of the coronavirus pandemic.
The group will also hold monthly meetings to sign off on the increases.
The revised accord is likely to keep the oil market in deficit throughout the first quarter, according to Bloomberg calculations using OPEC data, meaning bloated inventories will continue to drain. The cartel’s economists had calculated that if the group had gone ahead with the full supply hike that was set out in an original deal struck earlier this year, the market would have
flipped into surplus, potentially undermining a recent rally.
“The deal achieves the main goal of Saudi Arabia, namely to prevent crude stocks building during the first quarter,” said Amrita Sen, co-founder of consultant Energy Aspects Ltd.
The group’s effect goes beyond crude prices. The fortunes of the entire energy industry, from supermajors such as ExxonMobil Corp. to Texas shale producers to resource-dependent countries such as Brazil and Kazakhstan, are influenced by its moves.
“It’s a wise decision,” Iranian Oil Minister Bijan Namdar Zanganeh told state run news service Shana after the talks concluded. “These monthly meetings can help preserve stability in the market,” and the additional supplies coming in January won’t have a big effect, he said.
At those monthly meetings, ministers will adjust production up or down, and any alteration won’t be more than 500,000 barrels a day. The period during which compensation cuts can be made to offset past overproduction was extended to the end of March.
The arrangement reached Thursday was a compromise between countries that wanted to proceed with a much larger increase of 2million barrels a day, which had been agreed upon at an earlier meeting, and others, led by Saudi Arabia, that preferred to maintain current production cuts, estimated at 7.7 million barrels a day, given the uncertainties stemming from the pandemic.
Reaching a deal had been surprisingly difficult. The meeting held Thursday had been delayed for two days while officials struggled to reach a consensus.
Recent news about the efficacy of vaccines to ward off the coronavirus, which has caused oil prices to climb to their highest levels since they crashed in April, probably made it harder to reach agreement.
Responding to those higher prices, some oil producers saw less need to keep supplies tight and wanted to increase pumping to try to make up for almost a year of dismal oil earnings.
“As prices rise, the willingness to restrain supplies withers,” said Bhushan Bahree, an executive director at researcher IHS Markit.
What was striking was that the United Arab Emirates, long the closest ally of Saudi Arabia, OPEC’s de facto leader, proved difficult to corral. Analysts say the UAE’s ambitious leaders are irritated about several issues, ranging from a tight quota that sharply crimps their plans to substantially increase oil production to the Saudi-Russia domination of oil decision-making in recent years.
Several members of the group were worried that the market was still too fragile to absorb those extra barrels as a newwave of virus infections hit the global economy. Other nations were impatient to open the taps after months of production restraint that has put their finances under severe pressure.
The intensity of the fight earlier this week between Saudi Arabia and the UAE took OPEC-watchers by surprise, as the pair have long been staunch allies. But Abu Dhabi has been pursuing a more independent oil policy, is investing heavily in production and wants to pump more. Last month it even signaled it was considering its options outside the group.
Analysts, including Bahree, say the country, now the third-largest producer in OPEC after Saudi Arabia and Iraq, may be considering going its own way in oil matters.
“They don’t want to be sidelined and just be a follower,” said Energy Aspects’ Sen.
Out of frustration with the difficulty of forging a consensus, Prince Abdulaziz bin Salman, Saudi Arabia’s oil minister, who chairs OPEC Plus meetings, offered Monday to resign the chair of an influential committee that prepares theway for decisions by the group.
According to an OPEC news release Thursday, the oil producers urged him to continue chairing the committee aswell as OPEC Plus meetings, saying his efforts were “highly appreciated.”