OPEC opts against sharp increase in production, pushing oil prices to their highest level in seven years

OPEC and a Russian-led group of oil producers have agreed to continue ramping up production in measured stages, delegates said on Monday, deciding not to open the taps wider and pushing US crude prices to their limits. highest levels since 2014.

West Texas Intermediate, the main US oil price, rose 2.3% to close at $ 77.62 per barrel. Brent, the international gauge, added 2.5% to close at $ 81.26, its highest settlement price in three years. Rising oil prices recently prompted analysts and economists to expect OPEC and its Russian-led allies to increase production more significantly.

Instead, the Organization of the Petroleum Exporting Countries and Russia said the group, which calls itself OPEC +, will increase its collective production by 400,000 barrels per day in monthly installments, as part of a plan. previously agreed to bring production back to pre-Covid-19 levels. .

In the United States, oil drilling and production have increased, although they have not yet returned to pre-pandemic levels. The last time domestic crude prices were so high, there were about 1,100 more drilling rigs than the 428 in operation last week, according to oil services firm Baker Hughes Inc.

That was before the pandemic crushed demand for transportation fuels – and before OPEC and its market allies launched a price war against American shale drillers in late 2014 by turning on the taps and flooding the cheap crude market.

Average daily crude production in the United States was 6.7% lower than a year earlier, while commercial crude inventories, excluding the government’s strategic oil reserve, were lower by 15%, according to the US Energy Information Administration.

Recent oil gains are part of a large rally in the price of commodities, from lumber and oats to propane and natural gas. The gains were propelled by sharp increases in demand from reopening economies that overwhelmed producers’ ability to increase production and efficiently deliver raw materials to market. The rise in prices is being passed on to consumers through the rising cost of finished goods and has fueled fears that inflation could derail the economic recovery.

OPEC + abandoned the price war early last year when the coronavirus shut down economies and depressed demand. As economies began to reopen, OPEC + began to put that oil back on the market. More recently, it agreed to add around 400,000 barrels of crude per day each month, seeking to bring production back to pre-Covid-19 levels by next year.

Economies have started to buzz again after near hibernation during some of the worst times of the pandemic. Natural gas prices have also skyrocketed due to higher demand and low inventories in the United States and Europe. High coal and gas prices and government efforts to reduce electricity consumption have resulted in power cuts in China.

The shortages have contributed to the rise in oil prices, analysts said. Some of the gas-fired power plants in the world can switch to oil. While it is too early to tell if some have done so in large numbers, markets are anticipating an increase in demand for crude.

Saudi Arabian Oil Co. has predicted that a temporary switch from natural gas to oil in some power generation could add 500,000 barrels per day to oil demand.

Meanwhile, the American frackers, who normally increase production when prices rise, have instead limited their spending. The lack of increased supplies to the United States so far means that “price controls are largely in the hands of OPEC +,” said Mike Muller, head of Asia at commodity trading giant Vitol. , during a webinar hosted by a Dubai-based consulting firm on Sunday. Gulf Intelligence.

At a technical meeting last week to prepare for Monday’s meeting, OPEC economists told delegates the group could face an oversupply by the end of the year. A document prepared by the secretariat, consulted by the Wall Street Journal, predicted that the oil markets could be in surplus as early as December.

Delegates said the meeting was a straightforward affair, compared to recent OPEC + meetings which were more controversial. Earlier this year, the UAE delayed its decision for days, insisting it be allowed to pump more oil into the group’s complex quota system.

Between meetings last year and earlier this year, delegates went from optimism about the pace of the recovery to pessimism about signs of slowing growth. They got used to looking at the number of Covid-19 cases and vaccination rates, as well as global data on oil supply and demand.

Nahr Bin Umar oil field, north of Basra, Iraq.


Photo:

essam al-sudani / Reuters

This time, delegates said, they have come together to stick to the group’s progressive plan to increase production. Saudi Arabia has privately signaled to some delegates that it is now looking for higher prices to make up for lost revenue last year, delegates said.

Saudi Arabia’s oil export revenues nearly halved to $ 119 billion in 2020 from the previous year, according to the OPEC statistical report released last week.

The kingdom is also convinced that the global economy can face high prices as part of the post-Covid recovery, and has no fear that U.S. shale producers will profit from higher prices. In the past, shale producers quickly mobilized, increasing production to take advantage of prices.

This time around, according to Saudi officials, pressure from US investors has kept many at bay, delegates said.

“The kingdom is comfortable with the current price range and believes it will not weigh on demand for oil,” a Saudi official said.

Other OPEC members are simply unable to substantially increase production.

Angola, Algeria and Nigeria have been pumping hard and battling underinvestment in their oil fields for years. They don’t have the money to quickly add more capacity. Sanctions, meanwhile, have limited Iranian and Venezuelan production.

Write to Benoit Faucon at [email protected] and Summer Said at [email protected]

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