Vienna, Austria: The Organization of Petroleum Exporting Countries, OPEC, has agreed on a coordinated increase in crude supply by one million barrels per day to help reduce prices and prevent a supply shortage, in a significant reversal of the cartel’s strategy of curbing output over the past 18 months.
After a fraught meeting in Vienna in which Iran was initially at odds with a Saudi-led drive to boost production, ministers settled on a target they said would increase output by around 1m barrels per day (bpd).
Donald Trump, who has blamed the cartel for recent oil price highs, appeared to welcome the deal. “Hope Opec will increase output substantially. Need to keep prices down!” the US president tweeted after the agreement.
However, analysts and ministers said the actual amount of extra oil is likely to be around a third lower than the headline 1m figure.
The oil cartel also failed to spell out how the extra production would be allocated among members, a key question as several have no capacity to pump more crude.
Friday’s deal centres on how closely countries have stuck to production cuts that have been in effect since the start of 2017, driving a recovery in oil prices.
Opec said the cuts of 1.2m bpd had been far exceeded – at 158% in May – so in Vienna the group agreed to target 100% compliance instead. That would equate to an effective increase of around 1m bpd.
Khalid al-Falih, the Saudi energy minister, said the kingdom was ready to increase production.
“Saudi Arabia is unique. All of our spare capacity is available at short notice,” he said. However, he said the impact of the increase would not be felt until the end of summer, because crude would take weeks to reach markets.
The minister acknowledged that not all of the cartel’s members were in a position to increase output.
Crisis-hit Venezuela has suffered a nosedive in production, while Iran’s exports are due to be hit by US sanctions, so neither are in a position to increase supplies.
Iran failed in its effort to shoehorn a coded criticism of the US into the Opec communique.
Suhail al-Mazroui, the UAE energy minister and meeting’s president, suggested the agreement represented a good compromise.
“I think for the group to agree that we target that collective 1.2[m bpd] level is something that is good for us. That takes into account the differences between the different countries,” he said.
After nearly two years of relative unity at Opec as the group cut production to rebalance supply and demand, the talks in Vienna this week found the cartel divided.
After arriving on Tuesday, Iranian oil minister Bijan Zanganeh threatened to veto any agreement to raise output, though he eventually reached agreement with his Saudi counterpart on Friday. Observers had said earlier in the week that, “the body language has been awful”.
The Ecuadorean oil minister, Carlos Pérez, when asked if the talks had been fractious, said: “It’s been a difficult situation.” But he added the cartel hoped to continue its unity despite the disagreements.
Russia’s Minister of Energy Alexander Novak welcomed the initiative of the Organization of Petroleum Exporting Countries for a coordinated increase in supply by one million barrels per day. The Kremlin’s top oil official told journalists in Vienna that his government, which leads a group of other oil producing countries, supports the change in the global deal.
OPEC’s decision is in line with the proposals that were worked out by the monitoring committee for rebalancing the market, Novak said before the final decision and called the quota “reasonable.”
U.S. Energy Secretary Rick Perry will host Russia’s energy minister for a meeting in Washington next week, according to people familiar with the planning. It puts the top energy officials from the world’s largest oil and gas producers in the same room at a time when relations between the countries are increasingly under the spotlight. It is not clear what the administration’s goals are for a meeting with Russian Oil Minister Alexander Novak, but he will meet Perry at a time when President Trump and several members of his team have been prodding other oil-producing countries to help lower oil prices by pumping more. The meeting is planned for Department of Energy headquarters
Energy stocks moved sharply higher alongside soaring oil prices after OPEC decided on a rather modest increase in oil output that many not be enough to meet rising global demand as places like Venezuela and Libya face supply problems.
The XOP index of oil and gas exploration and production companies gains 3.3%, while the OSX oilfield services index jumps nearly 5% to a 2-week high. Individually, Exxon Mobil is up 2.5% at $81.64 a share, while frac sand firm US Silica Holdings is 4.6% higher.
While the OPEC news pushed US benchmark oil prices nearly 6% higher today to $69/bbl, its global rival benchmark Brent rose just 3% to $75/bbl, which could signal future problems for booming US oil exports. The spread between the two benchmarks had been closer to $10/bbl, making US-produced oil a bargain that was easy to sell in global markets. But a $6 spread that may keep trending lower means US shale producers will have to work harder to sell their crude overseas, especially given shipping alone costs a few dollars for each barrel. What’s more, US refineries are running at nearly 100% capacity, so keeping exports flowing is an absolute must. US crude exports average 1.8M bpd so far this year vs. 800000 last year.