OPEC and its allies are likely to gradually revive oil output in the second half of the year to ease consumer anxiety as prices trade near $80 a barrel, said Saudi Energy Minister Khalid Al-Falih.
The Saudi comments, echoed by Russia, mark a major shift in the historic alliance they forged in 2016 to end a global oil glut. While the producers were determined just a month ago to keep supply restrained and boost prices, they’re now changing course as oil’s surge to a three-year high puts strain on the global economy and draws political heat from major consumers, notably the US.
"I think in the near future there will be time to release supply" smoothly to avoid shocking the market, Al-Falih said at the St Petersburg International Economic Forum in Russia. When OPEC, Russia and other major producers meet in June “we will do what is necessary” to reassure consumers, the minister said.
He spoke after talks with his Russian counterpart Alexander Novak, who said the output increase would start in the third quarter, if it’s approved by other members of the group. Both men said the size of the boost was still subject to negotiation.
Oil fell sharply following the comments, with Brent crude losing as much as 2.5 percent to $76.84 a barrel as of 12:02pm in London. The international benchmark is still up 15 percent this year.
The Organisation of Petroleum Exporting Countries and its allies have been cutting more than intended under the terms of their deal for several months. That’s partly because of unplanned losses in countries including Venezuela and Angola, but also because the Saudis have consistently cut deeper to demonstrate their determination to rebalance the market.
The producers are now discussing a plan to bring the cuts back in line with what they originally agreed, said people familiar with the matter. They are still debating whether that would mean offsetting all the excess cuts made involuntarily in nations like Venezuela, or simply requiring individual members to move back in line with their own targets, which would entail a much smaller boost.
The lower end of the potential increase, backed by Gulf producers including Saudi Arabia, would add just 300,000 barrels a day to the market, one person said. The more generous option favoured by Russia would deliver an additional 700,000 to 800,000 barrels a day, the person said.
“Given current developments, with supply worries driving the price to $80, it would make perfect sense to remove the over-compliance by compensating for the shortfall from Venezuela,” said Ole Sloth Hansen, an analyst at Saxo Bank in Copenhagen.
Excess cuts amounted to about 740,000 barrels a day in April, according to estimates from the International Energy Agency. Without compensating supply from other members, this number looks likely to expand as the US re-imposes sanctions on Iran and the collapse of Venezuela’s oil industry worsens.
Whether the size of the supply increase is ultimately "a million, more, or less, we’ll have to wait until June," when OPEC and its partners will meet, Al-Falih said. Novak echoed that, saying “it’s too early now to talk about some specific figure, we need to calculate it thoroughly.”
Typically, OPEC operates by consensus, meaning members that have little prospect of boosting production - Venezuela, Iran and Angola - would have to agree to the proposal.
Saudi Arabia has recently shown willingness to push prices higher to bankroll domestic economic reforms and underpin the valuation of its state oil company in a planned initial public offering. That appears to be changing, with the Aramco listing delayed until 2019 and Brent crude flirting with the kingdom’s desired price of about $80 for most of this month.
In the past, oil prices close or above $100 a barrel have brought significant political pressure from consumer countries. US President Donald Trump directed his ire against OPEC last month, saying in a tweet that "oil prices are artificially Very High! No good and will not be accepted!"
At current levels, crude prices are starting to affect demand, said Daniel Yergin, vice chairman of consultant IHS Markit He was echoing concerns voiced last week by the IEA, which advises the major oil-consuming nations.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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