OPEC Plus agrees to a bigger increase in oil supply. But prices keep rising.
The group of oil-producing nations known as OPEC Plus agreed on Thursday to a larger increase in supply than planned for July and August.
The White House hailed the higher output as a diplomatic breakthrough after months of lobbying Middle East oil giants to raise production to ease price pressures. Administration officials said on Thursday that President Biden would visit Saudi Arabia, which effectively leads OPEC Plus, later this month.
His trip could signal a thawing of relations between Mr. Biden and the Saudi crown prince, Mohammed bin Salman, after the president vowed to turn Saudi Arabia into a “pariah” state during the 2020 election campaign because of the assassination of a critic of the Saudi government. News of the trip suggests that the president is now seeking to work with the Saudis on a number of fronts, including to tame rising fuel prices as inflation becomes a major problem for Mr. Biden and the Democratic Party in the midterm elections.
But it is not clear how far Saudi Arabia is willing or able to go to help Mr. Biden on oil prices. The amount of added crude oil that OPEC Plus committed to produce on Thursday is unlikely to cause gasoline prices to fall. In fact, the price of oil rose after the announcement.
After a videoconference, the group said it would raise production by 648,000 barrels a day in July and then again in August, an increase of about 50 percent over the monthly rise set under a program last year. Effectively, what OPEC Plus is doing is compressing three months of planned increases into two months.
But the OPEC Plus member countries are not expected to generate that output when the time comes. Many of the producers have already run out of additional production capacity. Only Saudi Arabia, the United Arab Emirates and one or two other countries have more oil to add.
Whatever they add risks being offset by what happens in Russia. Russian production is in decline in the wake of Western sanctions imposed after the invasion of Ukraine. According to the International Energy Agency, Russia is producing about 15 percent less than its target of 10.8 million barrels a day for July. Further decreases in Russian output are expected this year as the European Union’s effort to stop most Russian oil purchases takes effect.
While the amount of additional oil will not be large, some analysts say the fact that OPEC Plus was willing to depart from its previous routine could be the beginning of a breakthrough, leading to more cooperation from Saudi Arabia and other countries like the United Arab Emirates as sanctions reduce Russian output.
Until recently, these countries have insisted that they could not depart from the schedule agreed by OPEC Plus last July. The break comes after diplomatic work by Amos Hochstein, the Biden administration’s energy envoy, and other diplomats.
“It is more important to see this in terms of the political signal it sends than the actual number of barrels it adds,” said Bill Farren-Price, the head of macro oil and gas research at Enverus, a research firm. It suggests, he said, that Saudi Arabia “may be more prepared to boost supply” as sanctions further reduce Russian production.
With growing constraints on Russia’s production and exports, a reordering of the world energy market is underway. The Saudis and other OPEC Plus members with additional oil to produce could benefit. On the other hand, some analysts say, even the Saudis and the United Arab Emirates may be approaching the limits of how much oil they can produce.
“We think that too big of a burden is probably being placed on OPEC to offset the economic damage caused by a war” involving Russia, an enormous commodity exporter, Helima Croft, an analyst at RBC Capital Markets, wrote in a note to clients after the meeting.
OPEC Plus suggested in a news release that it was responding to a reopening from lockdowns in countries like China. Not mentioned was pressure from Washington for an increase in supply to address rising prices.
The Russia-Ukraine War and the Global Economy
A far-reaching conflict. Russia’s invasion on Ukraine has had a ripple effect across the globe, adding to the stock market’s woes. The conflict has caused dizzying spikes in gas prices and product shortages, and is pushing Europe to reconsider its reliance on Russian energy sources.
Global growth slows. The fallout from the war has hobbled efforts by major economies to recover from the pandemic, injecting new uncertainty and undermining economic confidence around the world. In the United States, gross domestic product, adjusted for inflation, fell 0.4 percent in the first quarter of 2022.
Energy prices rise. Oil and gas prices, already up as a result of the pandemic, have continued to increase since the beginning of the conflict. The sharpening of the confrontation has also forced countries in Europe and elsewhere to rethink their reliance on Russian energy and seek alternative sources.
Russia’s economy faces slowdown. Though pro-Ukraine countries continue to adopt sanctions against the Kremlin in response to its aggression, the Russian economy has avoided a crippling collapse for now thanks to capital controls and interest rate increases. But Russia’s central bank chief warned that the country is likely to face a steep economic downturn as its inventory of imported goods and parts runs low.
Trade barriers go up. The invasion of Ukraine has also unleashed a wave of protectionism as governments, desperate to secure goods for their citizens amid shortages and rising prices, erect new barriers to stop exports. But the restrictions are making the products more expensive and even harder to come by.
Food supplies come under pressure. The war has driven up the cost of food in East Africa, a region that depends greatly on exports of wheat, soybeans and barley from Russia and Ukraine and is already dealing with a severe drought. Amid dwindling supplies, supermarkets around the world have begun asking customers to limit their purchases of sunflower oil, of which Ukraine is a top exporter.
Prices of essential metals soar. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.
The Saudis are also trying to improve their relationship with the Biden administration. But Riyadh also does not seem to want to break its five-year alliance on oil matters with Moscow, which is a co-leader of OPEC Plus.
Oil prices, which had fallen about 3 percent before the meeting as traders anticipated a significant increase in production, reversed direction after the OPEC Plus announcement, with West Texas Intermediate crude, the U.S. benchmark, up more than 1 percent, to about $117 a barrel.
Nevertheless, the OPEC Plus decision received praise from the White House.
“The United States welcomes the important decision from OPEC Plus today to increase supply by more than 200,000 barrels per day in July and August based on new market conditions,” the White House press secretary, Karine Jean-Pierre, said in a statement.
While the Saudis had until now shrugged off requests for more oil, blaming high prices on geopolitics and shortages of refining capacity, analysts say they may now be concerned that real shortages that could damage the world economy and cut demand are on the horizon.
By August OPEC Plus will have, at least theoretically, returned to prepandemic production levels. Analysts say that moment could be an opportunity for the organization to reassess issues like production quotas or even Russia’s role in the organization.
The Saudis recruited Russia to join with Organization of the Petroleum Exporting Countries in 2016 because it was one of the world’s three largest producers, along with Saudi Arabia and the United States. Now, because of the invasion of Ukraine, Russia’s “days as an energy superpower are waning,” said Daniel Yergin, the energy historian, in a recent interview.
On the other hand, some analysts say the Saudis have invested too much in their relationship with Russia to give it up.
“They are not going to abandon Russia,” said Amrita Sen, the head of oil markets at Energy Aspects, a research firm, referring to the Saudis. “They are doing a little bit at the request of the U.S. That is all this is.”