OPEC, Russia and other major oil producers reached an unusual agreement on production quotas on Tuesday, with Saudi Arabia pledging to cut its oil production by one million barrels a day and Russia and Kazakhstan gaining production increases relatively modest.
The effect will be a general reduction in oil production. The news pushed prices up more than 4 percent, reaching levels not seen since February. Brent crude rose to more than $ 53 a barrel, and West Texas Intermediate surpassed $ 50 a barrel, with traders hailing the Saudi willingness to give up a few barrels in an effort to stabilize the market.
The difficulty in reaching consensus at the OPEC Plus group meeting seemed to show that cooperation between Saudi Arabia, the de facto leader of the Organization of Petroleum Exporting Countries, and Russia is once again under considerable tension. This tension may be a harbinger of difficulties in containing production in the coming months.
Upon discovering that they have been unable to avoid Russia’s demand for increased production, Saudi Arabia appears to have largely relented to preserve at least an appearance of unity.
“Instead of letting it all fall apart, the Saudis let the Russians get what they want,” said Bhushan Bahree, executive director of IHS Markit, a research firm.
Russia will now be allowed to increase production by 65,000 barrels per day in February and an additional 65,000 barrels per day in March, bringing production to more than 9.2 million barrels per day.
At the same time, to sustain the market, the Saudis offered to cut production by one million barrels a day – equivalent to about 1 percent of the world supply – to about 8.1 million barrels a day. That promise came late and was not reflected in the quota numbers published by OPEC after the meeting. The Saudis had been producing more than 11 million barrels a day at the height of a price war with Russia last spring.
“This was an idea developed internally,” said Prince Abdulaziz bin Salman, the Saudi oil minister, during a press conference after the meeting. The prince said that Saudi Arabia was making a gesture of “goodwill”.
The group met by video from Monday to consider an increase in February of around 500,000 barrels a day, after a similar increase this month.
The Russians wanted more production. They argued that unless OPEC Plus keeps up with the recovery in demand, the group will lose market share to shale oil producers in the United States. Russians also seem more optimistic about the world economy and the recovery in demand for oil.
The Saudis urged caution, with the pandemic still far from under control. They are fearful of easing the production cuts agreed by the group in April, which helped bring prices back from spring lows.
Before that deal and facing a drop in oil demand amid the first wave of the pandemic, Saudi Arabia and other producers tried to force Russia to agree to a major cut in production. When Russia objected, the Saudis increased production and cut prices, causing panic among traders in April, which ultimately led West Texas Intermediate’s price to fall.
The dynamics, however, changed with the April deal that ended the price war. Saudi Arabia and Russia had been moving together, with identical production quotas.
“Don’t put everything we have at risk for an instant, but illusory benefit,” said Prince Abdulaziz, who also chairs OPEC Plus meetings at the beginning of the conference.
Unable to reach an agreement on Monday, major producers, led by the Saudis, realized that it would be better to reach an agreement on Tuesday or risk scaring traders still concerned about the price war.
Saudis and other OPEC countries remain concerned about the prospects for their oil. OPEC Plus issued a statement after the meeting, noting the “shocking impact of the Covid-19 pandemic on the world economy and markets”.
“The increase in infections, the return of stricter blocking measures and the growing uncertainties have resulted in a more fragile economic recovery, which is expected to last until 2021,” the statement said.