(Bloomberg) — Saudi Arabia and Russia have a tentative deal to gradually increase OPEC+ oil output in the coming months, delegates said.
Negotiations over the details of the supply hike are still underway, the delegates said, asking not to be named because the information is private. The proposal under discussion would add about 2 million barrels a day to the cartel’s output from August to December, they said.
The implementation of the agreement would be conditional on the status of talks between Iran and the U.S., who are seeking to revive their nuclear pact and lift sanctions on the Islamic Republic’s oil exports, delegates said. It would also extend the expiry date for all of the OPEC+ cuts from April to December 2022, a delegate said.
The evolving debate between the Organization of Petroleum Exporting Countries and its allies has big implications for the oil market and the broader economy.
Crude has risen around 50% this year, with the recovery in demand from the pandemic outpacing the revival of OPEC+ supplies after last year’s deep cuts. Oil’s surge, combined with a rally in other commodities, has central banks fretting about inflation again. It also shows how Saudi Arabia and Russia are back in the driving seat of the global energy market — a remarkable comeback from negative prices just over a year ago.
Oil extended gains in New York, rising 2.7% to $75.43 a barrel.
OPEC+ is already in the process of reviving crude supplies halted last year in the initial stages of the pandemic. The 23-nation coalition decided to add about 2 million barrels a day to the market from May to July, and the question before ministers now is whether to keep going next month.
Yet the market has experienced a supply deficit for much of this year as the group’s output increases didn’t keep pace with the demand recovery. In the cartel’s view, that’s been an entirely necessary remedy — the only way to deplete the vast surplus in fuel stockpiles that accumulated as economies went into lockdown.
Now, the group’s data show oil inventories are back down to average levels as a strong revival in fuel consumption continues. Demand in the second half will be 5 million barrels a day higher than in the first six months of the year, OPEC Secretary-General Mohammad Barkindo said on Tuesday.
Yet there are several factors that could undo the rally.
There’s the risk of a supply influx if the U.S. reaches a nuclear deal with Iran. The highly infectious delta variant of Covid-19, which is already sending some countries back into partial lockdown and triggering a worrying rise in cases in other nations, threatens the demand recovery.
The cartel also faces the danger of a backlash from major consumers — including the U.S. — if oil keeps rising. Dharmendra Pradhan, minister of petroleum and natural gas for India — the world’s third-biggest crude importer — told OPEC officials last week that high prices were “adding significant inflationary pressure.”
“The last thing Saudi Arabia and the United Arab Emirates, even Russia, want is $85 a barrel, much less $100 a barrel,” Bob McNally, president of Rapidan Energy and a former White House official, told Bloomberg Television on Thursday. “So far in Washington, it’s been quiet. As we get closer to $80 a barrel, it’ll set off alarm bells” about the risk it poses to the economic recovery, he said.