Opec to boost oil output after Saudis clinch deal with Iran
VIENNA, June 23, 2018
Organization of Petroleum Exporting Countries (Opec) and allies including Russia will boost oil production starting next month, offering relief to consumers after Saudi Arabia secured a last-minute deal to overcome Iran’s opposition, said a report.
While it fudged some differences between members, the agreement is a victory for Riyadh and Moscow, which for a month have advocated for a production increase to alleviate high prices, reported Bloomberg.
It’s also a success for US President Donald Trump, who has criticised the Opec for inflating the cost of fuel, stated the report.
“Hope Opec will increase output substantially,” Trump said on Twitter after the meeting ended. “Need to keep prices down!”
Opec agreed on a “nominal” production increase of 1 million barrels a day, Saudi Energy Minister Khalid Al-Falih told reporters in Vienna. In reality, several ministers said the accord will add a smaller amount of oil to the market - about 700,000 barrels a day - because a number of countries are unable to raise their output.
"Opec got the message," said Abhishek Deshpande, an executive director at JPMorgan Chase & Co. "The Goldilocks oil price target is just shy of $70 a barrel, that should quiet the complaints from the consumers."
The hope is that the deal is enough to keep oil just under $70 a barrel, although Saudi Arabia and other members are focusing on supply and demand, rather than on a price target, said one Opec delegate.
The vague language in the communique and lack of real targets could allow Riyadh and others to fine tune their production to keep the market in check, reported Bloomberg.
The document didn’t mention the specific production hike cited by Al Falih, instead pledging that the group would focus on restoring its output cuts to the level originally agreed in 2016.
Opec and its allies exceeded their pledged 1.8 million barrel-a-day production cut by 47 per cent last month, according to Russian Energy Minister Alexander Novak.
That’s about 850,000 barrels a day of additional supply losses that have been largely unintentional, reflecting the collapse in Venezuela’s oil industry and long-term declines in Mexican output.
Saudi Arabia has enough spare capacity to offset those losses and keep a lid on prices, but Al-Falih has acknowledged that such a move isn’t politically palatable for his fellow Opec members.
The final communique made no mention of whether the kingdom, or any other member, could compensate for losses elsewhere. Yet it said the group as a whole should strive for “overall conformity” of 100 per cent, which in practice will only be achievable if those nations with spare production capacity step in to fill the gap left by others.
"The lack of specificity is bullish for prices,” said Joe McMonigle, senior energy analyst at Hedgeye Risk Management LLC. “It’s a mystery oil production increase because we don’t really know the final numbers."
Crude actually rallied following the Opec deal, with US benchmark West Texas Intermediate jumping as much as 4.6 percent to $68.43 a barrel.
The vague language may help to preserve the hard-won unity of the group of 24 oil producers, whose cooperation ended a three-year price slump.
It salvages an agreement that was very much in doubt on Thursday evening after Iranian Oil Minister Bijan Namdar Zanganeh walked out of a meeting with fellow ministers, predicting nobody could persuade him to back an increase.
"It wasn’t easy, but everyone found a way to navigate the obstacles," said one minister, who asked not to be named discussing the details of the closed-door meeting. "The Iranian resistance was strong and the communique is the art of finding the middle ground," he added.
