Opec and Russia are set to boost oil output by up to 1m barrels a day, in a move to curb a rally that had taken prices above $80 a barrel and prompted calls for restraint from the US.
The decision to raise output, though not to be finalised until next month, is a stark reversal for the oil cartel and its allies who have been reducing supply since the start of last year. The increased production is seen replacing lost supply from Venezuela and Iran once sanctions are imposed.
The move will be seen as a victory for US president Donald Trump who last month attacked Opec for "artificially" boosting prices and has leaned on US allies in the Gulf, including Saudi Arabia, to ensure oil markets remain well supplied.
Oil prices dropped 2 per cent on Friday after the news, with Brent crude slipping to $76.84 a barrel.
"Oil prices will soften in the near term, as a consequence of Opec easing supply curbs," said Ashley Kelty at Cantor Fitzgerald.
The jump above $80 a barrel last week for the first time since 2014 came as the US withdrew from the nuclear deal with Iran — the third largest Opec producer and Saudi Arabia’s arch rival in the region — putting additional sanctions on its oil industry.
The US said at the time it was in consultation with producers to make sure oil markets remained well supplied, which was seen as a thinly veiled reference to its ally Saudi Arabia.
The kingdom’s powerful Crown Prince Mohammed bin Salman had lobbied the US to take a harder line with Iran, but the US president has become concerned about the impact of rising gasoline prices, with crude up more than 50 per cent in 12 months.
The decision to boost production came as Saudi Arabia’s energy minister, Khalid al Falih, met his Russian counterpart Alexander Novak at an economic forum in St Petersburg last night, where the initial outline of the plan to raise output was discussed.
Mr Falih said on Friday they needed to adjust policy as the oil market had changed.
The measures are likely to see producers with spare capacity raise output by as much as 1m b/d — or roughly 1 per cent of global oil demand — though the number could be lower depending on how they calculate production targets. Opec and Russia are due to meet formally in Vienna on June 22nd.
Both sides have emphasised it does not spell the end of their co-operation, which saw Russia — the largest oil exporter outside Opec — agree to assist the cartel in ending a prolonged slump in prices in late 2016, in a deal partly hammered out between Russian president Vladimir Putin and the Saudi crown prince.
Compliance with the deal, which originally targeted removing 1.8m b/d between Opec, Russia and a number of smaller producers outside the cartel, has soared to well above 150 per cent due to output declines in other countries, while Saudi Arabia has reduced production under its target.
Opec’s secretary-general Mohammed Barkindo said Mr Trump’s tweet last month had prompted the cartel to respond as “we pride ourselves as friends of the US”, Reuters reported.
– Copyright The Financial Times Limited 2018
