OPEC Members Plan to Substantially Increase Oil Production
Posted June 23, 2018 1:28 p.m. EDT
VIENNA — Saudi Arabia said Saturday that it was substantially increasing oil production to cool down rising prices and head off potential future shortages.
Khalid al-Falih, the Saudi energy minister, told journalists at the headquarters of the Organization of the Petroleum Exporting Countries here that Saudi Aramco, the national oil company, was in the process of ramping up production to increase exports from Saudi ports in July. “Ships have been scheduled, and it will be hitting the markets, I assume, in August,” he said.
While declining to give a specific number, al-Falih said the kingdom would be increasing output by “hundreds of thousands, not tens of thousands, of barrels” — a substantial amount.
The Saudi comments were the most tangible indication yet that the kingdom, Russia and other big exporters are reversing their 17-month policy of holding oil off the market. Complaints about artificially high oil prices from President Donald Trump and other leaders of oil-consuming nations have played a role in the change of policy. There are also growing worries that declining supplies from Iran and Venezuela could make for an overly tight oil market in the future.
The major producers appear to have consumers’ interests in mind more than they have in the past. Al-Falih said that in addition to the tweets from Trump, Prime Minister Narendra Modi of India had spoken “clearly and loudly” about the negative impact of high oil prices on the Indian economy and that he had received phone calls with similar complaints from officials in China and South Korea, also big customers for Saudi crude.
Noting that an audit has found that Saudi Arabia has even more oil in the ground than previously estimated, he said that with decades of supplies to sell, Saudi Arabia needed to keep consumers buying oil and be mindful of their interests. “If one of the barometers to gauge that was a tweet from the president of the United States, so be it,” he said. “We will listen to it.”
As al-Falih explained it, the big producers are shifting from a regime in which oil production has been tightly controlled and monitored to one in which countries with spare output capacity will be encouraged to exceed individual quotas to head off any price spikes.
“They are preparing for more disruptions, and they are preparing to react to them as they feel is needed,” said Roger Diwan, a managing director of IHS Markit, a research firm, who was observing the meetings.
Saudi Arabia gained this ability Friday, overcoming objections from Iran, which expects its production to decline in the wake of the Trump administration’s recent decision to withdraw from the country’s nuclear deal and reimpose economic sanctions.
With Russia’s energy minister, Alexander Novak, at his side, al-Falih fleshed out OPEC’s cryptic decision Friday to raise production by saying that OPEC and Russia were aiming to lift output by a collective 1 million barrels a day, or by about 1 percent of world supplies.
Al-Falih explained that the major producers have been overshooting the production cuts agreed to in late 2016 by nearly 1 million barrels, in part because output from some countries like Venezuela has declined precipitously amid political turmoil. The production cuts have helped prices more than double from their lows in early 2016. Brent crude oil, the main international bench mark, closed at $75.55 a barrel Friday.
The countries that have been holding back oil, including Saudi Arabia, Russia, Kuwait and the United Arab Emirates, will now work to fill the gaps.
Al-Falih also suggested that traders, who pushed up oil prices sharply Friday after the OPEC decision, may have underestimated the major producers’ determination to act.
If the major producers are free to produce what they want, immediate shortages seem unlikely. Saudi Arabia says it has 2 million barrels in spare capacity, well over what is needed. Analysts estimate that Russia could increase production by 400,000 barrels a day. Kuwait and the United Arab Emirates could also add more oil.