OPEC+ decided to open its oil taps more quickly during the summer months as a gesture of goodwill toward the United States, but Russia remains at the cartel’s heart.
The White House applauded the agreement, which came after months of diplomatic pressure on Saudi Arabia to lower energy costs, which have wreaked havoc on the economy since President Vladimir Putin’s invasion of Ukraine.
The tiny supply increase, which accounted for only 0.4 percent of worldwide demand in July and August, may help to loosen markets. The question of whether the US can turn Saudi Arabia into an ally in its campaign to economically isolate Russia remains unresolved.
“The ice is melting in Saudi-American diplomatic ties,” said Bill Farren-Price, a director at Enverus Intelligence Research. “However, more work is required before full normalization.” “A bigger question is whether the US can force a wedge between Riyadh and Moscow.”
Prior to Thursday’s OPEC+ meeting, oil had plummeted on allegations that Saudi Arabia and other members were prepared to cover the market gap left by Western sanctions on Russian oil, or possibly kick Russia out of the OPEC+ quota system entirely. Since the start of the war, Russia’s output has dropped by around 1 million barrels per day, and it may drop even more now that the European Union has agreed to more restrictions on its oil.
The Organization of Petroleum Exporting Countries and its allies eventually agreed on a policy adjustment that was significantly less dramatic. The alliance agreed to enhance oil production by 648,000 barrels per day in July and August, a 50 percent increase over recent months. The plan received full support from Moscow, and talks were completed in just 11 minutes, according to participants who asked not to be identified because the material was confidential.
Farren-Price described the arrangement as “a rather minor modification.” Given the cartel’s repeated failures to meet its production targets, several analysts projected that the real increased volumes reaching the market would be substantially lower than the headline amount.
As of 12:12 p.m. in New York, West Texas Intermediate crude was up 1.7 percent to $117.21 a barrel, reversing earlier losses.
Even widening the taps is a significant change for Saudi Arabia. Even after Russia’s invasion of Ukraine upended global markets and sent energy prices rising, the kingdom still adhered to the OPEC+ agreement for moderate monthly supply increases. Last week, Saudi Arabia’s foreign minister stated that there was nothing more the nation could do to calm oil markets, even implying that there was no crude shortage.
The move on Thursday signals that the White House’s political pressure is paying off. According to those familiar with the situation, Joe Biden is expected to visit Saudi Arabia later this month, a trip that will almost certainly include a meeting with the kingdom’s facto ruler, Crown Prince Mohammed Bin Salman. The US president holds him responsible for the assassination of a US-based writer in 2018, but with record-high petrol prices weighing on his party’s election chances, Biden is under pressure to mend fences.
“The United States applauds OPEC+’s crucial decision to boost supply today,” White House Press Secretary Karine Jean-Pierre said. “We acknowledge Saudi Arabia’s involvement in attaining this consensus as to the chair of OPEC+ and its largest producer.”
The increase in OPEC+ output will be distributed proportionally among members as is customary. Countries that have been unable to increase production, such as Angola, Nigeria, and, most recently, Russia, will be given larger quotas, implying that the actual supply rise would be less than the official amount, as has been the case in recent months.
“Will the target increase result in a significant rise in the number of real barrels reaching the market?” In a note, Giovanni Staunovo, a strategist at UBS Group AG, wrote. “Effective production gains will likely be approximately half of the target,” he said.
Only Saudi Arabia and the United Arab Emirates have adequate spare capacity to cover a large amount of the supply shortfall created by Russia’s sanctions. Even with the production hikes in July and August, much of that will remain untapped, setting up a pivotal OPEC+ conference in two months that will determine whether the US and Europe can persuade their Gulf friends to break farther away from Moscow.
In an interview, Amrita Sen, co-founder and research director at Energy Aspects Ltd., stated, “This does build the basis perhaps for a Biden visit at the end of the month, and maybe we may see some more rises from September onwards.” At the same time, “OPEC+, particularly Saudi Arabia, wishes to remain a member of the organization.”