OPEC and its Russia-led oil-producing allies normally like to keep the market guessing, but the expanded oil cartel is laying its cards on the table. That predictability comes with its own risks.
After the United Arab Emirates caused a deadlock over its own production quota earlier this month, the group reached an agreement on Sunday to raise its collective production by 400,000 barrels a day each month through September 2022. By the end of that period, the group would have unwound the entirety of the 5.8 million-barrel-a-day production that is currently being held back from baseline levels. The pace of easing matches the Organization of the Petroleum Exporting Countries’ forecast, which sees world oil demand recovering to pre-pandemic levels by year-end 2022.
The guidance gives a lot of visibility by OPEC+ standards; the group typically telegraphs plans for the coming few months, not an entire year. As part of the deal, the U.A.E. gets to further increase its production quota alongside other countries such as Iraq, Kuwait, Saudi Arabia and Russia, starting in May 2022.
When asked how Saudi Arabia and the U.A.E. reached an agreement, Saudi Arabia’s energy minister,
Abdulaziz bin Salman,
said, “Why should I divulge it? This is an art and we keep it between ourselves,” according to a CNBC report. Because OPEC+ discussions are so opaque, one working theory is that the cartel manufactures or plays up the tension (such as Saudi Arabia’s clash with the U.A.E.) to keep the market—especially U.S. producers—on its toes. Whether staged or not, the occasional show of disunity is an effective way of reminding everyone that member countries are capable of unleashing barrels.
The group has been so effective at resolving conflicts recently that the signals aren’t having the expected effect. After OPEC+ failed to reach an agreement in its scheduled meeting earlier this month, oil prices dipped initially but recovered, as if the market couldn’t envision full-blown chaos. And, despite Sunday’s OPEC+ resolution to only restore production gradually, crude-oil prices were down more than 3% on Monday morning.
Meanwhile, the additional visibility is a gift to U.S. frackers, who are able to produce oil from a new well within months. Even after falling below $70, the U.S. crude-oil benchmark is roughly $20 higher than what it takes for a typical shale driller to profitably drill a new well. Producers also have been quickly returning to pre-drilled wells that can be brought online quickly: There were 6,252 drilled but uncompleted wells in seven major tight oil and shale natural-gas basins as of June, a 30% decline from a year earlier, according to the U.S. Energy Information Administration. U.S. oil inventories have fallen to the steepest seasonal deficit compared with the five-year average since 2003, according to RBC Capital Markets.
Of course oil exporters still have another lever they could pull. The group still meets every month and can diverge from its plans if needed. The oil market will believe it when it sees it.
Write to Jinjoo Lee at email@example.com
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