Oil cartel Opec agrees deal to boost oil production – what does it mean for you?

The world’s major oil producers have agreed to significantly increase production as the price of oil soars. Saloni Sardana looks at the deal.

Oil producers’ cartel Opec and its allies (together known as “Opec+”) have struck a much anticipated deal to increase oil production to take advantage of a sharp rise in oil prices this year – without adding so much to supplies that it craters the oil price again.

The group, which includes Saudi Arabia, Kuwait, Iraq, Russia and the United Arab Emirates (UAE), will raise oil production by 400,000 barrels per day from August, and by two million barrels per day by the end of the year.

The increased output will continue until the end of December 2022, extended from the original end date of April 2022.

Another key part of the agreement is that it allows for higher “production baselines” – measures used by countries to calculate how much their production should be cut by.

This is seen as a major victory for the UAE, which had argued that its previous baseline figure of 3.2 million barrels per day was too low. It was pushing for an increase to 3.8 million barrels.

Lower production baselines reflect lower output capabilities. The UAE wanted baseline production figures to be increased to reflect its higher output capabilities.

A disagreement between Saudi Arabia and UAE over these production baselines had been a significant sticking point in previous discussions and was part of the reason the Opec meeting was postponed earlier this month.

What does this mean for the oil industry?

Opec and its allies reached a historic output deal last April which led to a production cut of 9.7 million barrels in response to the sharp fall in oil demand caused by the Covid-19 pandemic.

The early days of the pandemic drove oil prices down to multi-year lows, with Brent crude crashing from $65 a barrel in February 2020 to just above $22 in April 2020. The price of US crude, West Texas Intermediate (WTI), even briefly turned negative.

There was scepticism as to whether countries would stick to their quotas (they often have not in the past). But with the exception of a few “laggard moments” from the likes of Iraq and Nigeria, most countries maintained a rare level of high compliance with the quotas, and some even over-cut production.

Partly as a result of this – but also as a result of economies opening back up – oil prices then reversed many of last year’s low prices and soared.

However, with the Opec+ agreement signed, the oil price slipped to its lowest level in a month this weekend.

What this means for investors

“The modest pace of output increases is a sign of lingering concern about the strength of the global recovery as Covid-19 variants continue to emerge,” according to the Financial Times. In other words, the oil cartel hasn’t let rip as much as it could have simply because it doesn’t want to flood the market with unwanted supply.

Countries including the UK have eased restrictions. But with the highly contagious Delta variant ripping across the world, there are lots of concerns that it could impede the recovery.

India is reporting significantly lower cases than during its deadly second wave, but the strain is still causing havoc across Asia, Europe and other countries, potentially derailing the reopening plans of many.

The increased production is bearish in the nearer term for oil prices as Covid-19 demand concerns coincide with a speculative market that has likely reached its peak, points out Jeffrey Halley, senior market analyst at OANDA.

But over the longer-term the agreement is likely to be bullish for the market as the agreement shows “Opec+ cohesion remains intact, without worries of a member's production free-for-all,” adds Halley.

On top of that, it’s worth noting that the other big factor in the oil supply – US fracking – is noticeably more subdued than it has been in past oil cycles. For now at least, as Bloomberg puts it, “American shale producers [are] favouring fiscal discipline over boosting output.” That’s good news for their shareholders but not necessarily good news for consumers who might be hoping for a lower oil price.

In the immediate term, the Delta variant and progress in tackling it is more likely to determine where oil prices go from here. But in the longer run, ongoing hostility to the extraction industries in the west, and ongoing discipline among Opec cartel members, suggests we’ve yet to see the highs for oil prices.

Recommended

Private pensions: act early to avoid a big inheritance tax bill
Pensions

Private pensions: act early to avoid a big inheritance tax bill

Frozen inheritance-tax thresholds mean HMRC is taking ever more in death duties. But there are steps you can take to avoid it, says David Prosser.
18 May 2022
Should you buy Vodafone shares, or steer clear?
Share tips

Should you buy Vodafone shares, or steer clear?

Vodafone grew revenue by 4% and profit by 11% last year, and offers investors a 6.4% dividend yield. So should you buy Vodafone shares? Rupert Hargrea…
17 May 2022
2021 Château La Mascaronne rosé: a work of art from Provence
Wine

2021 Château La Mascaronne rosé: a work of art from Provence

This wine soars above all others with its grace, refinement and impressively long finish
17 May 2022
The UK jobs market is still red hot – but will it last?
UK Economy

The UK jobs market is still red hot – but will it last?

For the first time ever, there are more job vacancies than people to fill them, and wages are rising at a decent clip. But that might just be a tempor…
17 May 2022

Most Popular

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
Is the oil market heading for a supply glut?
Oil

Is the oil market heading for a supply glut?

Many people assume that the high oil price is here to stay – and could well go higher. But we’ve been here before, says Max King. History suggests tha…
16 May 2022
High inflation will fade – here’s why
Inflation

High inflation will fade – here’s why

Many people expect high inflation to persist for a long time. But that might not be true, says Max King. Inflation may fall faster than expected – and…
13 May 2022