The Organization of the Petroleum Exporting Countries and its allies agreed today, Thursday, to accelerate oil production in July and August, in what some see as a Saudi response to American pressure to calm bloated crude oil prices, but will the move be enough to calm prices?
The amount of the increase was slight, as the “OPEC +” group said it would increase production by approximately 650,000 barrels per day in both months, but it was originally planning to increase by 400,000 barrels.
This means that the real change in its plan is to add only 250 thousand barrels per day of crude, while the West hopes to reduce by 2-3 million barrels per day from Russian oil exports, according to “Reuters” estimates.
The move came just days after the European Union agreed to impose a ban on Russian oil imports, deepening fears of a global energy shortage as Russia’s military operation in Ukraine continues and markets shaken. Russia leads the “OPEC +” alliance along with Saudi Arabia.
According to the Financial Times, Saudi Arabia and the UAE, two prominent producers in the Organization of the Petroleum Exporting Countries, are likely to be responsible for most of the additional increases in supply, as Riyadh previously indicated its willingness to increase production in the event of a lack of Russian supplies.
Today’s approval of additional supplies is the first time the OPEC+ group has deviated from the agreed-upon supply policy in the depths of the oil market crash two years ago, and comes after months of high-level US diplomacy to repair relations between Riyadh and Washington.
The White House welcomed the decision, which it described as “important” and credited Saudi Arabia with “achieving this consensus among the members of the group,” and acknowledged “the positive contributions of the UAE, Kuwait and Iraq.” However, today’s modest increase decision will not constitute a fundamental change in the oil market conditions, and of course will not compensate for Russian supplies.
Today, Thursday, Russian Deputy Prime Minister Alexander Novak said that the “OPEC +” decision to increase oil production by 648,000 barrels per day will balance the oil market. On the other hand, the West wants to increase supplies to the point of achieving excess production to drive prices down sharply.
Novak added: “OPEC + has taken into account that it is necessary to increase oil production by 648,000 barrels per day in July and August to meet the increased demand.”
He continued, “Oil production in Russia increased in May after a decrease in April, in June there is more growth and an equilibrium point is reached that is commensurate with the current conditions.” On the global demand situation, Novak said: “The growth of global demand for oil in 2022 will reach 3.5-4 million barrels per day.”
“There is not a lot of excess oil in the market to make up for potentially lost supplies from Russia,” said Bjarne Schieldrop, senior commodity analyst at SEB Bank. He added that the EU ban would likely result in Russia selling “less oil but at a higher price and possibly earning as much if not more”.
The group’s decision comes just weeks before a scheduled visit to the Middle East by US President Joe Biden, which may include a stop in Riyadh, despite the strained relationship with Saudi Crown Prince Mohammed bin Salman.
For her part, Amrita Sen of consultancy Energy Aspects said: “Saudi Arabia is still working within the OPEC + framework to add some additional barrels under political pressure.”
Gasoline prices skyrocketed to US inflation growth to a 40-year high, denting Biden’s popularity as he approaches the midterm elections. This explains the great American interest in lowering oil prices, of course, in addition to pressure on one of the most important sources of income for Russia.
A source familiar with the matter told Reuters that Washington wants to clarify oil production plans during Biden’s possible visit to hold a summit with leaders of Arab Gulf states, including Mohammed bin Salman, in Riyadh.
While a second source familiar with the discussions about Biden’s visit said that the issue is not only related to oil production, but also issues of Gulf security and human rights, adding that Riyadh and Washington have shown a greater willingness to listen to the concerns of the other side.
Oil prices fell sharply in early trading on Thursday after the Financial Times first reported a potential deal to add more supplies, with Brent crude dropping to near $112 a barrel from $116 on Wednesday.
However, crude erased its losses and rose slightly after Thursday’s meeting, with “Brent” trading above $116 a barrel, as analysts said that “relatively modest” supply additions would not be enough to calm oil markets, which witnessed the highest price levels in a decade over the past months. .
The new “OPEC +” agreement will accelerate an already planned supply increase, effectively ending the two-year quota system that has helped lift oil prices by nearly 500 percent from the deepest collapse due to the pandemic.
Saudi Arabia and other “OPEC” members remain concerned about the level of spare production capacity available to them, which analysts believe is very limited, so they are still reluctant to increase production too quickly, fearing that the current tightness in the oil market will become a direct shortage at a later time. In 2022, or more precisely, the current problem will turn into a deeper and long-term crisis.
“OPEC +” alluded to the continued strong global demand for oil in its statement after the meeting, saying that it “noted the recent reopening of societies from (epidemic) closures and the demand for global refineries is expected to increase.” In her speech, she highlighted the “importance of stable and balanced markets”.