By Grant Smith, Salma El Wardany, Javier Blas and Dina Khrennikova
“As we move to the next phase of the agreement, the extra supply resulting from the scheduled easing of production cuts will be consumed as demand continues on its recovery path,” Saudi Energy Minister Prince Abdulaziz bin Salman said at the start of an OPEC+ video conference on Wednesday. “Economies around the world are opening up, although this is a cautious and gradual process. The recovery signs are unmistakable.”
The Organization of Petroleum Exporting Countries and its allies will withhold 7.7 million barrels a day from the market in August, compared with cuts of 9.6 million currently. The group’s two largest members, Russian and Saudi Arabia, publicly backed the move, and other ministers participating in the video conference had agreed in principle, delegates said.
That supply increase will be offset somewhat by members that didn’t fulfill their commitments to reduce output in May and June — such as Iraq and Nigeria. They will make up for those shortcomings with 842,000 barrels a day of extra reductions in August and September, delegates said.
On paper, full delivery of the compensation cuts could shrink the 2 million-barrel-a-day supply increase scheduled for August by almost half. However, it’s unclear how much of the reparations will actually be delivered by countries that have consistently failed to fulfill their pledges.
Prince Abdulaziz, who has made it his mission to end the quota cheating that has dogged OPEC+ since its inception in 2016, said these compensation cuts are a crucial principle and the group must resist the temptation to relax.
OPEC+ is reviving supplies as fuel consumption picks up with the lifting of lockdowns around the world. The alliance’s curbs, equivalent to almost 10% of global supply, helped more than double crude prices from the lows hit in late April, when demand plunged by more than 20 million barrels a day.
The tapering of production cuts is “fully in line with the current market trends,” said Russian Energy Minister Alexander Novak. “Almost all of the output hikes will be consumed in domestic markets of the producing countries as the demand is recovering.”
Saudi Arabia’s own exports won’t change next month, despite the output increase, as domestic demand rises, said Prince Abdulaziz.
“Nobody could really expect OPEC+ to keep the 9.7 million barrel-a-day curtailments into August,” Paola Rodriguez-Masiu, senior oil markets analyst at consultant Rystad A/S, said by email. “Boosting output by 2 million barrels a day is not little, but the demand recovery, even though a little slower than expected, justifies it.”