Will OPEC+ ease oil deal?

Will OPEC+ ease oil deal?

OPEC members are discussing a compromise agreement that would see an oil production increase of 300,000-600,000 barrels per day over the next few months, according to people briefed on the talks, Bloomberg reported.

OPEC officials are also working on putting the cooperation between the cartel, Russia and other oil producers - the so-called OPEC+ group currently comprising 24 nations - on a permanent footing. 

According to Bloomberg, the prospect of binding Russia, the world’s largest exporter after Saudi Arabia, more closely to OPEC might help persuade Iran and Venezuela, another skeptic about the need for an increase, to back higher production in the second half of the year.

Russia said the total increase should be as much 1.5 million barrels. A quota increase of that size shared among all members wouldn’t deliver a commensurate boost in production because several countries, including Venezuela where economic crisis is slowly destroying the oil industry, are unable to raise output.

An increase of 300,000 to 600,000 barrels a day would be a real increase in production from those countries with spare capacity including Saudi Arabia, Russia and the United Arab Emirates. Some OPEC members back increasing output by the lower end of the 300,000 to 600,000 barrel a day range, one of the people said.

A leading analyst of the National Energy Security Fund, a lecturer at the Financial University under the Government of the Russian Federation, Igor Yushkov, speaking to Vestnik Kavkaza, noted that OPEC countries can afford to increase quotas within the framework of the oil output cut deal, since the agreement has already fulfilled its task - it has increased oil prices. "The OPEC deal was signed when oil prices were about $40 per barrel, and now we see prices above $70 per barrel. Now all countries want to extract more oil and the price of each barrel almost costs twice as much as on the day of signing the agreement," he explained.

"In any case, prices will decline when OPEC decides to produce more oil, but we will not go back to $40 per barrel. A pullback below $70 per barrel is possible, but the market participants are agree on it. Only decline below $60 would be undesirable for market participants. Initially it was a matter of redistributing quotas in the OPEC deal, since Venezuela is producing less oil because of the for socio-economic situation and Iran may reduce its production volumes again under new US sanctions - so the overall quota may well be preserved," Igor Yushkov expects.

Deputy director of energy policy of the Institute of Energy and Finances, Alexey Belogoriev, agreed with the fact that the price of $60 per barrel is enough for participants in the OPEC deal. "The price of $75-80 per barrel is clearly unstable and there is an increasing risk that next summer prices may collapse back to $40-45 per barrel. Therefore, the countries of the OPEC + format, including Russia, consider prices of $50-60 per barrel more acceptable, with a smaller amplitude and more predictable. All countries expect that average annual prices will remain within $60 per barrel," he said.

"One should also take into account the fact that U.S. shale oil production increased significantly. But U.S. production has not reached the maximum rates in the past year and in the first half of this year. In this connection, OPEC countries will benefit from lowering prices and cooling the surge of the US activity," Alexei Belogoriev said.

It is very important for OPEC + to solve the problem of Venezuela. "Venezuela cut its production several times more than it had to because of a very difficult economic situation. There is a prospect that it will continue to cut production further. The amount of increased oil output that is being discussed in the framework of the OPEC + agreement is fully correlated with the decline made by Venezuela in the last 1.5 years. Each country has its own reasons for increasing production, but for Russia further deterrence of production is economically much more costly because it is necessary to preserve investment projects, which significantly slows down economic growth," the economist drew attention.