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In a concession to the West, the Organization of Petroleum Exporting Countries and an affiliated group of oil producers led by Russia agreed last week to raise their output quota to an additional 648,000 barrels a day in July and August, up from the 432,000 they had negotiated earlier this year.
President Joe Biden and other Western leaders have been pressuring the group to pump more oil to push fuel prices down.
Saudi Arabia supported the higher output limit not to lower prices but to curry favor with the U.S., from which it wants stronger security guarantees, according to The Wall Street Journal.
The bump in output follows a drop in Russia’s production as a result of sanctions placed on the country by NATO after Russia attacked Ukraine.
In April, Russia’s output fell by 950,000 barrels a day compared to February, the International Energy Agency (IEA) reported.
Last week, the European Union agreed to bar tankers carrying Russian oil and refined products.
Despite OPEC’s promise of more oil, prices rose last week, with benchmark Brent crude rising Friday above $121. It settled at $119.99 on Monday this week.
Prices rose in part because some OPEC members have steadily failed to pump enough oil to meet their share of the 432,000 extra barrels already promised, leading analysts to believe the producer group will fail to fulfill its pledge of 648,000 barrels this summer.
We detailed OPEC’s stumble in “OPEC+ Continues to Raise Oil Output. What’s the Deal?” (8 Feb 2022).
Even factoring out Russia’s missing production, the cartel was producing 1.32 million barrels a day below its overall target, IEA data shows.
The only producers who have the spare capacity to raise their production and sustain the increase for at least 90 days are Saudi Arabia and the United Arab Emirates, the WSJ noted.
Prices could rise further if Russia decides to withhold more of its oil from the world market this summer “to inflict maximum economic pain” on the West, commodity strategist Helima Croft at RBC Capital, told the WSJ.
Russia should pump 20 to 30 percent less oil to boost its price and keep from selling at a discount to market prices, a Russian oil executive recently wrote in a newspaper essay.
The new higher limit on oil production “may have done wonders for Saudi Arabia diplomatically, but it is a drop in the ocean for world oil markets,” WSJ said.
TREND FORECAST: Oil prices will remain high during the summer season as more people drive and fly to their tourist destinations.
Consumers’ growing reluctance to spend, which we report in “China’s Exports Fall as World Shifts Spending Back to Services”in this issue, will combine with the impending global economic slowdown, will push prices down, but not greatly: the winter heating season will raise gas and oil demand again, keeping prices elevated through this year.