OPEC+ seeks agreement on oil production policy

The Organization of Petroleum Exporting Countries (OPEC) and non-OPEC, an energy alliance often referred to as OPEC+, was expected to reconvene via teleconference on July 2 to discuss the next phase of oil production policy on whether to keep output policy unchanged or to boost supply further.

Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, told New Europe by phone on July 2, that OPEC kingpin Saudi Arabia and non-OPEC leader Russia seems to be on the same page. OPEC+ had agreed in principle to increase supply by 400,000 barrels per day from August to December in order to meet rising demand. “I think the volumes have been specified to have a total of 2 million barrels per day by the end of the year. So, it’s going to be 400,000 barrels per day each month if they can be distributed evenly,” he said.

Kokin noted, however, that the United Arab Emirates (UAE) opposed these plans on the grounds that OPEC+ should change the baseline for cuts, effectively raising its production quota. The UAE has invested billions of dollars to boost oil capacity. “The UAE is getting unhappy about the investment they have made and production capacity has not been reflected. The reference level should be higher. It could be a good thing for the market because the market actually expected about 500,000 barrels per day so perhaps it will be closer to that as a result which is okay,” Kokin said.

The UralSib expert explained that demand is recovering despite the slowdown because of the delta Covid-19 variant. “We’re still going to have pretty strong demand by the end of the year. So, Russia and Saudi Arabia, they want to keep the price where it is, more or less. They don’t want it to go up to $80-85 (per barrel) because presumably that would incentivize the wrong production in the US and Canada and Brazil and Norway. Especially if they don’t want that they should happy to increase a little bit more than 400,000 barrels per day. I don’t see much problem here,” Kokin said.

OPEC+ has gradually added more production, confident US shale will not return to an era of rapid growth. “I think the Emirates would either compromise or have it their way. I think the issue is within OPEC, not with OPEC+ as whole because the practice they have used is called nominal – unless there is a good reason to avoid it. The good reason is the situation in Venezuela or Iran because of those emergency situations like sanctions or wars. Under normal situations they always use the nominal capacity. So, it goes up, it means any cuts have to recalibrated and this is a legitimate, I think. The Emirates have been unhappy about the depth of those cuts. Not the first time I heard about it,” Kokin said.

Russia’s position is that needs to rebuild production on a steady even gradual basis because of its geology and its geography. Russia cannot simply turn the production back on in one period whereas Saudi Arabia, the UAE and some other Gulf producers can do that. Because of their geology, they can restore production very quickly. Russian cannot – it needs a much longer lead in time and therefore that’s why they have always been pressing for the recovery in volumes.

“I think that’s a very Russian kind of style of doing things. Because you may remember that earlier this year in the first half, there were small increases allowed for Kazakhstan and for Russia. That’s why. It was about 100,000 barrels per day. What’s going to happen again is pretty much the same because Russia’s share in OPEC+ production is close to 25%. So, it’s going to be increasing at the same – like 100,00 barrels per day each month and that’s convenient,” Kokin said.

Delta Covid variant

Asked if he is concerned the spread of the delta Covid-19 variant will curb oil demand, Kokin said, “Everyone is concerned because we hear reports that recovery is slowing down especially in Asian countries”.

Renewed lockdown measures and rising costs have already resulted in slower down growth in China. “The question is whether it is going to affect countries that are well vaccinated. If existing vaccines offer pretty good protection, then it’s okay in the west, if not huge problem, because they will be rollouts and everybody is trying to get vaccinated,” Kokin said, adding, “There are a lot of things we don’t know but it looks like more less a slower recovery than another dip. That’s how it looks now”.

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