OPEC+ agrees to bigger increase
Group to ramp up by 648,000 barrels a day in July, August
The group of oil-producing nations known as OPEC+ agreed Thursday to a larger increase in supply than planned for July and August.
The White House hailed the higher output as a diplomatic breakthrough after months of lobbying Middle East oil giants to raise production to ease price pressures. Administration officials said Thursday that President Joe Biden would visit Saudi Arabia, which effectively leads OPEC+, this month.
His trip could signal a thawing of relations between Biden and Saudi Crown Prince Mohammed bin Salman after Biden vowed during the 2020 election campaign to turn Saudi Arabia into a “pariah” state because of the assassination of a critic of the Saudi government. News of the trip suggests that the president is seeking to work with the Saudis on a number of fronts, including to tame rising fuel prices as inflation becomes a major problem for Biden and the Democratic Party in the midterm elections.
But it is not clear how far Saudi Arabia is willing or able to go to help Biden on oil prices. The amount of added crude oil that OPEC+ committed to produce is unlikely to cause gasoline prices to fall. In fact, the price of oil rose after the announcement Thursday.
After a videoconference, the group said it would raise production by 648,000 barrels a day in July and then again in August, an increase of about 50% over the monthly rise set under a program last year. Effectively, what OPEC+ is doing is compressing three months of planned increases into two months.
But the OPEC+ member countries are not expected to generate that output when the time comes. Many of the producers have run out of additional production capacity. Only Saudi Arabia, the United Arab Emirates and one or two other countries have more oil to add.
Whatever they add risks being offset by what happens in Russia. Russian production is in decline in the wake of Western sanctions imposed after the invasion of Ukraine. According to the International Energy Agency, Russia is producing about 15% less than its target of 10.8 million barrels a day for July. Further decreases in Russian output are expected this year as the European Union’s effort to stop most Russian oil purchases takes effect.
While the amount of additional oil will not be large, some analysts
said that the fact that OPEC+ was willing to depart from its previous routine could be the beginning of a breakthrough, leading to more cooperation from Saudi Arabia and other countries such as the United Arab Emirates as sanctions reduce Russian output.
Until recently, these countries insisted they could not depart from the schedule agreed by OPEC+ in July. The break comes after diplomatic work by Amos Hochstein, the Biden administration’s energy envoy, and other diplomats.
“It is more important to see this in terms of the political signal it sends than the actual number of barrels it adds,” said Bill Farren-price, the head of macro oil and gas research at Enverus, a research firm. It suggests, he said, that Saudi Arabia “may be more prepared to boost supply” as sanctions further reduce Russian production.
With growing constraints on Russia’s production and exports, a reordering of the world energy market is underway. The Saudis and other OPEC+ members with additional oil to produce could benefit. On the other hand, some analysts said that even the Saudis and the United Arab Emirates may be approaching the limits of how much oil they can produce.
“We think that too big of a burden is probably being placed on OPEC to offset the economic damage caused by a war” involving Russia, an enormous commodity exporter, Helima Croft, an analyst at RBC Capital Markets, wrote in a note to clients after the meeting.
OPEC+ suggested in a news release that it was responding to a reopening from lockdowns in countries such as China. Not mentioned was pressure from Washington for an increase in supply to address rising prices.
The Saudis also are trying to improve their relationship with the Biden administration, but they do not seem to want to break their five-year alliance on oil matters with Moscow, a coleader of OPEC+.
Oil prices, which had fallen about 3% before the meeting as traders anticipated a significant increase in production, reversed direction after the OPEC+ announcement, with West Texas Intermediate crude, the U.S. benchmark, up more than 1%, to about $117 a barrel.
Nevertheless, the OPEC+ decision received praise from the White House.
“The United States welcomes the important decision from OPEC+ today to increase supply by more than 200,000 barrels per day in July and August based on new market conditions,” White House press secretary Karine Jean-pierre said in a statement.
While the Saudis have until now shrugged off requests for more oil, blaming high prices on geopolitics and shortages of refining capacity, analysts said they may now be concerned that real shortages that could damage the world economy and cut demand are on the horizon.
By August, OPEC+ will have, at least theoretically, returned to prepandemic production levels. Analysts said that moment could be an opportunity for the organization to reassess issues such as production quotas or even Russia’s role in the organization.
The Saudis recruited Russia to join with OPEC in 2016 because it was one of the world’s three largest producers, along with Saudi Arabia and the United States. Now, because of the invasion of Ukraine, Russia’s “days as an energy superpower are waning,” said Daniel Yergin, an energy historian, in a recent interview.
On the other hand, some analysts said that the Saudis have invested too much in their relationship with Russia to give it up.
“They are not going to abandon Russia,” said Amrita Sen, the head of oil markets at Energy Aspects, a research firm, referring to the Saudis. “They are doing a little bit at the request of the U.S. That is all this is.”