Opec-Plus Token Supply Gesture Signals Group Cohesion

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Opec-plus' decision to raise output by 100,000 barrels per day in September sends the faintest of signals to the US and other consumers that their oil price concerns aren't being ignored entirely. The louder, clearer message was of alignment between Saudi Arabia and Russia, and of their intent to keep the alliance alive to ensure effective market management. The decision comes amid unrelenting inflationary pressures and a complex geopolitical environment — with US-China tensions soaring last week but Iran nuclear talks also resuming.

In the end, it was another smooth affair for Opec-plus on Aug. 3 — no matter the expiry at end-month of the group's Covid-19-driven production cut pact, known as the Declaration of Cooperation (DOC). Alliance ministers smoothly entered the next phase of Opec/non-Opec collaboration by announcing a 100,000 b/d output hike for September, distributed among members, while keeping baselines unchanged. The apparent alignment between Russia and Saudi Arabia means cooperation is set to continue. But the fact that the increase was proposed by Saudi Arabia, according to sources close to the matter, might be viewed as a gesture to the administration of US President Joe Biden following his visit to the kingdom amid strained relations.


The small increase reflects the reality that most Opec-plus producers — bar Saudi Arabia and the United Arab Emirates — are unable to pump more, as well as producers' argument that prices are being driven by factors such as geopolitical tensions and general underinvestment in the upstream sector. A new round of Iran nuclear talks, announced on short notice last week, adds to an unpredictable environment.

Opec-plus' decision will do little to address sky-high overcompliance to quotas, which has curtailed market supplies. Compliance among the Opec-10 stood at 236% in June, up from 133% in January, which means the group fell short of its output target by 1.115 million b/d, a Joint Technical Committee report stated last week.

Opec's overcompliance still paled in comparison to that of the alliance's non-Opec partners, which reached an unprecedented 464% in June, compared with 123% in January. This means non-Opec countries pumped 1.724 million b/d less oil than targeted, with Russia and Kazakhstan alone falling short by 885,000 b/d and 407,000 b/d, respectively. Against this backdrop of a combined 2.839 million b/d supply shortfall under the pact, the added volumes will have limited, if any, impact on price levels going forward. Saudi Arabia's share of the 100,000 b/d increase is 26,000 b/d and the UAE's 7,000 b/d.

Good Reception in Washington

US Energy Envoy Amos Hochstein still struck a positive note, saying that the recent decline in oil prices had been “remarkable” although further declines would be preferable. He added that Saudi Arabia had hiked oil output by a remarkable level in July — Energy Intelligence understands by some 200,000 b/d — and that the US would continue to monitor oil markets to see if the Opec-plus hike was adequate, according to media reports. From a Saudi perspective, the July output hike, which still kept the kingdom beneath its output target, signals coherence within Opec-plus but also represents a nod to Washington.

US officials previously said they hadn't expected an immediate move to increase production from Biden's trip, but expressed some hope that action would be taken soon after — including possibly from September. The US State Department announced on Aug. 3 that it had approved possible foreign military sales to Saudi Arabia and the UAE worth $3.05 billion and $2.24 billion, respectively.

Russia's Key Role Reinforced

Opec-plus cohesiveness is supported by the close alignment of heavyweights Saudi Arabia and Russia. While Russia's crude output has been hit by Western sanctions, it still produces around 10.7 million b/d of crude and condensate and has spare capacity of at least 500,000 b/d. This comes on top of the clear political will of the leaderships in both Moscow and Riyadh to maintain cooperation, including within the Opec-plus framework.

Ahead of last week's meeting, the stage had seemingly been set for an agreed Saudi-Russia position: Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman spoke on Jul. 21, on the heels of Biden's mid-July trip to the kingdom. Russian Deputy Prime Minister Alexander Novak a week later paid a follow-up visit to Saudi Arabia, where he met with Energy Minister Prince Abdulaziz bin Salman.

Novak said last week that Opec-plus was acting “cautiously” given the state of the market. For Moscow, the deal aligns with its two key objectives: maintaining production and exports in the face of Western sanctions; and keeping oil prices at high levels, allowing it to continue offering steep discounts for sales to Asian and other new buyers.

For Mideast Gulf Opec producers, not least Saudi Arabia, long-term market management is seen as unachievable without Russia. The producer group's new secretary-general, Haitham al-Ghais, in an interview with Kuwaiti daily Al-Rai , reiterated the position that Moscow remains a “strategic partner” that was essential to the success of the DOC. “Preserving the alliance seems to be the main priority for Opec-plus leaders,” Edward Bell, senior director for market economics at Emirates NBD, said last week.

For Riyadh, deepening ties with Moscow is also part of its strategy to balance strategic relations between traditional Western allies led by the US on the one hand, and Russia and China on the other. The growing ties go back to King Salman's 2017 visit to Russia, the first ever by a Saudi monarch, and recognition among both sides that joint oil market management works to both sides' benefit — and will be needed for some time to come, including to manage longer-term energy transition pressures.

Oliver Klaus is Energy Intelligence's Eastern Hemisphere News Editor and Dubai Bureau Chief. A version of the article originally appeared in Energy Compass.

Opec/Opec-Plus, Opec-Plus Supply , Sanctions, Oil Prices
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