Opec and its allies have reached an agreement to raise oil production at a time of soaring prices, after compromising over how the output targets of some of its largest members are calculated.
Members of the Opec+ group including the UAE, Saudi Arabia, Russia, Iraq and Kuwait will all be awarded higher production baselines — the level from which output deals are calculated — in a victory for Abu Dhabi that had threatened to scupper a deal early this month.
The result of the long-delayed meeting should mean higher oil production from members in the months ahead, as oil prices have soared to the highest level in three years, threatening to drag on the economic recovery during the bounce back from the Covid-19 pandemic.
Initially Opec+ will pump an extra 400,000 barrels a day each month from August, ramping up output by around 2m barrels a day in total by year end. Those monthly production increases will continue next year, with Opec+ saying it has extended the deal until December 2022 from April 2022.
“The meeting noted the ongoing strengthening of market fundamentals, with oil demand showing clear signs of improvement,” Opec+ said in a statement.
Under the agreement, the UAE’s production baseline, which it has complained failed to reflect its rising production capacity, will go up to 3.5m b/d from around 3.2m b/d currently, according to people familiar with the talks.
Saudi Arabia and Russia will both see their baselines rise to 11.5m b/d (from 11m b/d today) while Iraq and Kuwait both had their baselines raised by 150,000 b/d to 4.8m b/d and Kuwait’s 3m b/d respectively.
The oil producers group slashed production by almost 10m b/d at the height of the demand-sapping lockdowns and travel bans in April 2020, but has been adding production slowly back as economies reopen.
Around 5.8m b/d of output remains off the market, but that level is expected to be largely returned by the end of 2022.
Brent crude, the international oil benchmark, has soared to a three-year high above $75 a barrel as demand has recovered, with traders warning that the market is tightening rapidly.
Questions remain over whether the amount of volume restored by Opec+ will be enough to significantly dampen prices in the coming months, as demand is expected to continue to rise.
The UAE’s complaints over baselines had thwarted a deal earlier this month and revealed a faultline between Abu Dhabi and Riyadh, with Saudi Arabia traditionally the most powerful member of the core Opec group.
Talks this week with Saudi Arabia laid the groundwork for the compromise.
The decision to increase other large member’s production baselines appears calculated to avoid a split in the wider group, though it is unlikely to lead to higher production targets until next year, when the original deal expires in April 2022. The existing baseline will remain in place until that time, Opec+ said.
The next Opec+ meeting will be held on September 1.