Changed OPEC+ agreement has less to do with oil prices than with Saudi Arabia’s diplomatic currency with Washington.
By guest author Jinjoo Lee from the Wall Street Journal
After months of ignoring oil consumers’ calls to turn on the taps, OPEC+ has finally agreed to step up production targets. But the real winner of the deal appears to be Saudi Arabia, not motorists.
The Organization of the Petroleum Exporting Countries and a Russia-led group of producers on Thursday agreed to increase crude production by 648,000 barrels a day in both July and August, compared with 432000 barrels a day each month according to their earlier pledge. But the stepped-up target follows a decline in Russian oil production since Moscow invaded Ukraine in late February.
The major exporter’s crude-oil production in April had dropped by 950000 barrels a day compared with its output in February, according to data from the International Energy Agency. The European Union earlier this week agreed to ban seaborne imports of oil and refined fuels from Russia.
Markets quickly reassessed how much real effect the stepped-up target would have on prices. Brent crude had fallen as low as USD 113 a barrel after The Wall Street Journal reported Wednesday that some OPEC members were exploring the idea of suspending Russia’s obligations to pump more oil under the extended group’s oil-production deal. Brent recovered to above $117 a barrel following Thursday’s announcement.
Saudi Arabia’s sudden change of heart appears to have less to do with oil prices—which have been in the triple digits for at least three months—and more to do with diplomatic currency with Washington, from which Saudi Arabia has been looking to get better security assurance. The change follows a flurry of visits by U.S. officials to the kingdom.
President Biden, who has had a far chillier relationship with the country’s leadership than his predecessor, could make a visit at the end of this month. Increasing oil production is a “central element” in talks about a possible visit, the Journal has reported.
Another reason prices rebounded could be that many OPEC members haven’t managed to keep up with the production allotted under their target quotas so far this year.
The group is almost certainly going to fall behind its stepped-up target in the months ahead. Even after taking Russia out of the equation, OPEC+ as a group was producing 1.32 million barrels a day below its collective target in April, according to IEA data. Many countries have been unable to keep up with rising targets because of “dwindling spare capacity and reduced operational efficiency,” according to the IEA.
The only countries that have any real spare capacity—meaning capacity that can be reached within 90 days and sustained for a long period—are Saudi Arabia and the United Arab Emirates. Between them, the two countries had less than 3 million barrels a day of spare capacity in April.
The stepped-up production plan also doesn’t do much to address the risk that Russia could deliberately hold back barrels.
Helima Croft, head of commodity strategy at RBC Capital Markets, wrote in a recent report that the European Union’s ban on seaborne Russian oil imports could lead Russia to slash exports this summer “to inflict maximum economic pain.” Notably, a Lukoil executive wrote in a Russian newspaper that Russia should cut oil production by 20% to 30% to get a better price on oil and to avoid selling at a discount, Reuters reported Monday.
Thursday’s OPEC+ agreement may have done wonders for Saudi Arabia diplomatically, but it is a drop in the ocean for oil markets.