OPEC, After Bolstering Prices, Considers Ramping Up Oil Production
Posted June 22, 2018 11:55 a.m. EDT
VIENNA — Major oil-producing countries agreed Friday to jointly raise exports, a decision that has driven considerable division among them but that could temper criticism from President Donald Trump.
Officials from the Organization of the Petroleum Exporting Countries, as well as other major producers like Russia, were set to increase their total output by around 1 percent of the global oil supply. Though a relatively small addition to the world energy market, the move nevertheless signals a willingness by international suppliers to address rising prices.
“We will come out with an agreement to ease market concerns about the availability of crude oil,” Khalid al-Falih, Saudi Arabia’s energy minister, said Friday in Vienna. Partly to paper over differences within the group, OPEC did not give a specific figure for the increase, but analysts estimated it would amount to between 600,000 barrels and 1 million barrels a day of additional supply.
The price of Brent crude, the international benchmark, has been little changed at $74 a barrel over the past week, as traders expected a deal. But it briefly topped $80 a barrel last month.
The deal to cut output, reached in 2016, had been an extraordinarily cooperative effort by OPEC and other producers. Countries that had historically been at odds agreed to restrict their overall crude sales to bolster prices, though Saudi Arabia and Russia held back the most.
But the curbs have generated opposition among major oil consumers. Trump, perhaps with an eye on the midterm elections in November, has repeatedly criticized OPEC for maintaining what he said were “artificially very high” prices, while other major oil importers like India have also been critical. The president weighed in Friday, saying in a tweet that OPEC would need to “increase output substantially.”
“Need to keep prices down!” he continued.
Saudi Arabia, OPEC’s de facto leader and a major U.S. ally, has pushed for a change in course. The country is an oil-producing juggernaut and has the spare capacity to quickly raise production. But others, particularly Riyadh’s regional rival Iran, have pushed back.
Iran is already exporting oil at close to its maximum capacity, and so will not be able to take advantage of the increase. In fact, the country would be likely to suffer because the increased supply would force prices lower, reducing Tehran’s government revenues. The timing is far from ideal for Iran, which is having to grapple with the possible impact of U.S. sanctions on its energy sector.
The tensions have been evident here in Vienna. Iran’s oil minister, Bijan Zanganeh, stormed out of a preparatory technical meeting Thursday, frustrated by what he saw as Saudi Arabia forcing through its proposals.
Saudi Arabia has gone from being a price hawk, wary of raising production to alleviate increasing oil prices, to a dove. On Thursday, Falih told his colleagues at a seminar in Vienna that there could be a supply shortfall of 1.6 million to 1.8 million barrels a day of oil later this year, making a reversal of the cuts imperative.
“We are not going to allow a shortage to materialize to the point where markets will be squeezed and consumers will be hurt,” he said.
While he vowed to be “sensitive” to the concerns of producer countries like Iran and Venezuela that are unlikely to be able to raise output and benefit from increased production, he made clear that Saudi Arabia was determined to increase supplies.
Falih said he hoped to keep the group together, and to work in unison to head off extremes like prices that topped $100 a barrel in 2014, only to be followed by a sudden crash.
“One thing you can be assured of is, we will be responsive,” he added. “We will release supplies.”
The prospect of increased supplies — Russia and Saudi Arabia had proposed the outlines of Thursday’s deal last month — has helped cool off what had been fast-rising prices. What happens to those prices now may depend on factors that are out of OPEC’s control. Among them are the possible impact of U.S. sanctions on Iran’s oil sector, and the continuing collapse of Venezuela’s oil industry, as well as the consequences of a widening array of trade disputes on economic growth and demand for oil.
The changing U.S. role in world energy markets is itself a variable. While Trump is leaning on OPEC to keep gasoline prices down, the United States is on the verge of becoming the world’s largest oil producer, as well as a major exporter of both oil and gas.
“I think this rearranges the mental geography of the global oil market and, really, geopolitics,” said Daniel Yergin, an oil historian observing the OPEC meeting in Vienna. The transformation of the U.S. oil industry over the last few years, largely as a result of shale drilling, has turned the United States from a major energy importer into a petroleum powerhouse. That has led Saudi Arabia and Russia, the world’s two other leading oil producers, but which have not always seen eye to eye, to create a bloc large enough to influence prices.
But the pre-meeting fireworks with Iran showed how hard it would be to preserve unity among other producers, now that prices have risen. Tehran, in particular, has been infuriated by the Saudi call for increased production. The country has also been particularly affected by the rise in United States oil exports — the resurgent U.S. sector has made it easier for Trump to risk reimposing sanctions on Iran, which throttle back what had been rising oil exports from the Gulf country.
Venezuela is also vulnerable to U.S. pressure, thanks to the strengthened U.S. energy industry. Sanctions from the United States have prohibited the sale and purchase of Venezuelan debt, including bonds issued by the state oil company, Petróleos de Venezuela, and banning the use of the country’s digital currency, the petro.
That has crimped the energy company’s ability to refinance $50 billion in bonds that it has defaulted on since last year. Elsewhere, fighting in Libya has cut into global supplies, as well.
“Stability is elusive,” Edward L. Morse, head of commodities research at Citigroup, said at a seminar in Vienna.