- OPEC ministers announced a deal on Friday that will increase oil supplies from the producer group.
- Producers agreed to start pumping more so that they are no longer overshooting the production limits they agreed to in November 2016.
- Analysts say the agreement is likely to add around 600,000 to 800,000 barrels a day to the market, helping to tame oil prices that have soared to multi-year highs recently.
OPEC ministers announced a deal on Friday that will increase oil supplies from the producer group, which has been capping output in order to balance the market and boost prices for the last 18 months.
The agreement came after a week of tense negotiation at OPEC’s headquarters in Vienna, Austria. Top OPEC producer Saudi Arabia faced the challenge of convincing a handful of reluctant producers including Iran, Iraq and Venezuela to support an output hike.
While OPEC avoided the disastrous outcome of ending the week without a deal, it left the oil market somewhat disappointed by declining to announce a hard figure.
“With the looming threat of an Iran walkout, the best you could get was deliberate ambiguity,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.
On Friday, OPEC members agreed to start pumping more oil, though the agreement will not end the group’s 18-month-old deal to limit output. Instead the producers are seeking to cut no deeper than 1.2 million bpd, the target they set in November 2016.
OPEC’s official statement said members agreed to return to 100 percent compliance with the 2016 deal beginning on July 1. The group said compliance reached 152 percent in May 2018, which means OPEC was cutting about 600,000 bpd more than it intended.
Ahead of the official decision, sources said the group was aiming to restore about 1 million bpd to the market. However, industry sources familiar with the oil cartel’s deliberations said the actual increase is likely to total around two-thirds of Saudi Arabia’s target.
That’s because some OPEC members would be unable to sufficiently ramp up crude production. Analysts say supply increases are more likely to fall in a range between 600,000 to 800,000 bpd.
OPEC’s agreement with Russia and other producers to limit oil output has helped to clear a global supply overhang that weighed on prices for years.
However, OPEC faced pressure to increase output from President Donald Trump and big consumers like India after the cost of crude soared to multi-year highs, boosted by strong demand, dwindling output from Venezuela and renewed U.S. sanctions on Iran.
Oil prices shot up on Friday as details of the deal leaked ahead of the statement. John Kilduff, founding partner at energy hedge fund Again Capital, said the lack of clarity in the official statement around a production target was boosting crude futures.
“They definitely came up short, relative to expectations,” he told CNBC. “A headline touting … 1 million barrels of additional output would have made a difference.”
The group also did not explain how it would allocate the production increases across its 14 members. That has been a sticking point all week because only a handful of members like Saudi Arabia, the United Arab Emirates and Kuwait have the ability to increase output.
“How is it allocated? I think that is not yet decided due to the fact that there are differences between certain countries,” UAE’s Energy and Industry Minister Suhail Mohamed Al Mazrouei said at a press conference following the meeting.
Mazrouei, who currently serves as chairman and president of OPEC, added that it “would not make sense if we allocated production to a country that cannot produce it, so we avoided, I think, having allocations from that perspective.”
The holdout through the week was Iran, OPEC’s third biggest oil producer. The country sought to avoid a large production increase, which would weigh on prices at a time when Iran’s exports are expected to drop sharply as U.S. sanctions take effect in the coming months.
Iran’s oil minister, Bijan Zanganeh, pushed OPEC to include a statement in the communique criticizing U.S. sanctions on Iran and Venezuela, but the group rebuffed the demand.
“OPEC isn’t a political organization. Everybody pushed back on that ” Nigerian petroleum minister Emmanuel Ibe Kachikwu told CNBC.
The members’ vastly differing relations with the United States loomed over the meeting following reports that Washington asked its Saudi allies to hike output prior to restoring sanctions on Iran.
Trump also directly blamed OPEC’s production cuts for boosting oil prices in a pair of recent tweets. On Friday, the president again urged the group to “keep prices down” at its meeting, even though his decision to sanction Iran was a major factor in boosting the cost of crude.
OPEC is scheduled to meet with Russia and several other producers on Saturday to discuss their role in easing production limits.
The wider producer alliance has sought to keep 1.8 million bpd off the market. But output among the 24 nations has actually fallen by about 2.8 million bpd, due largely to cratering production in Venezuela and supply disruptions elsewhere.
Saudi Energy Minister Khalid al-Falih said Friday morning that no-one should expect to see an “immediate flood” of oil coming back onto the market following the meeting.
He also warned the world could face a supply deficit of 1.8 million bpd in the second half of 2018 and that it was OPEC’s responsibility to alleviate consumers’ concerns.