OPEC, Russia and other major oil producers reached an unusual agreement on production quotas on Tuesday, with Saudi Arabia pledging to reduce its oil production by one million barrels per day and Russia and Kazakhstan winning relatively modest production increases.
The effect will be an overall reduction in oil production. The news has seen prices rise by more than 4 per cent and reach levels not seen since February. Brent crude rose above $ 53 a barrel, and West Texas Intermediate exceeded $ 50 as traders welcomed Saudi Arabia’s willingness to give up a few barrels in an effort to stabilize the market.
The difficulty of reaching consensus at the meeting of the OPEC Plus group showed that cooperation between Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, and Russia is once again under great pressure. This tension could be a harbinger of trouble limiting production in the coming months.
When Saudi Arabia found itself unable to repel Russia’s demand for a production increase, it appeared that it had largely conceded to preserve at least a semblance of unity.
“Instead of letting everything fall apart, the Saudis let the Russians have what they want,” said Bhushan Bahree, executive director of IHS Markit, a research firm.
Russia will now be allowed to increase by 65,000 barrels per day in February and by 65,000 per day in March, which will increase production to more than 9.2 million barrels per day.
At the same time, to boost the market, the Saudis voluntarily cut production by one million barrels a day – equivalent to about 1 percent of world stock – to about 8.1 million barrels a day. This promise came late and was not reflected in the quota numbers published by OPEC after the meeting. The Saudis produced more than 11 million barrels a day at the height of a price war with Russia last spring.
“It was a homemade idea,” Prince Abdulaziz bin Salman, the Saudi oil minister, told a news conference after the meeting. The prince said Saudi Arabia signified “good will”.
The group began meeting video on Monday to consider an increase of about 500,000 barrels per day in February, following a similar boost this month.
The Russians wanted more production. They argued that unless OPEC Plus keeps pace with recovery, the group will lose market share to shale oil producers in the United States. The Russians also appear to be more sanguine about the world economy and the recovery of oil demand.
The Saudis have called for caution, with the pandemic far from under control. They were careful to help reduce the production cuts the group agreed to in April, which helped bring prices down from their spring lows.
Before the agreement and amid declining demand for oil amid the first wave of the pandemic, Saudi Arabia and other producers tried to force Russia to agree to a major production cut. When Russia objected to this, the Saudis increased production and lowered prices, causing a panic among traders in April, which eventually caused the price of West Texas Intermediate to turn negative.
However, the dynamics changed with the April agreement that ended the price war. Saudi Arabia and Russia moved in the same step, with identical production quotas.
“Do not jeopardize everything we have achieved for the sake of an immediate but illusory advantage,” Prince Abdulaziz, who also chairs OPEC Plus meetings, said at the start of the conference.
The major producers, led by the Saudis, could not reach an agreement on Monday and thought they would be better off reaching a compromise on Tuesday or taking the chance to keep traders still wary of the price war.
The Saudis and other OPEC countries remain concerned about the prospects for their oil. OPEC Plus issued a statement after the meeting noting the “shocking impact of the Covid-19 pandemic on the world economy and markets.”
“Increasing infections, the return of stricter closure measures and increasing uncertainties have led to a more fragile economic recovery that is expected to continue in 2021,” the statement said.