Opec and its allies have come to a close agreement to increase oil production at a time of rising prices, after compromising how to calculate the production targets of some of its largest members.
Members of the Opec + group including the UAE, Saudi Arabia, Russia, Iraq and Kuwait will all receive higher production bases – the level from which production deals are calculated – in a win for Abu Dhabi which had threatened to scupper an agreement earlier this month.
The result of the long delayed the meeting is expected to mean higher oil production from members in the coming months, as oil prices are set to reach their highest level in three years, threatening to drag the economic recovery during the return from the Covid-19 pandemic .
Initially Opec + will pump an additional 400,000 barrels per day each month from August, increasing production by about 2m barrels per day in total by the end of the year. 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 continued strengthening of market fundamentals, with oil demand showing obvious signs of improvement,” Opec + said in a statement.
According to the agreement, the UAE’s production base, which it has complained does not reflect its growing production capacity, will increase to 3.5mb / d from about 3.2mb / d currently, according to people familiar with the discussions.
Saudi Arabia and Russia both see each other baseline rising to 11.5mb / d (up from 11m b / d today) while Iraq and Kuwait both had their bases elevated from 150,000 b / d to 4.8mb / d and Kuwait 3m b / d respectively.
The group of oil producers reduced production by almost 10m b / d to the height of demand-driven blocks and travel bans in April 2020, but added production to slowly return as economies reopen.
About 5.8mb / d of production remains off the market, but that level is estimated to be largely restored by the end of 2022.
Brent crude, the international benchmark for oil, went to a three-year high above $ 75 a barrel as demand rebounded, with traders warning that the market is tightening rapidly.
Questions remain about whether the amount of volume restored by Opec + will be enough to significantly dampen prices in the coming months, as demand should continue to grow.
The UAE’s complaints about the bases exploited an agreement earlier this month and revealed a fault between Abu Dhabi and Riyadh, with Saudi Arabia traditionally the most powerful member of the core Opec group.
Discussions this week with Saudi Arabia have established the foundation for compromise.
The decision to increase the production baselines of other large members seems calculated to avoid a split in the wider group, although it is unlikely to lead to higher production targets until next year, when the 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 1st.