Saudi Arabia and Russia are working towards a deal that would cautiously increase the supply of oil in the coming months as prices climb to the highest level in almost three years.
As the Opec+ group of oil ministers meets on Thursday, people familiar with the talks said Opec and its partners outside of the cartel were discussing gradual monthly production increases of several hundred thousand barrels a day between August and December.
But traders and analysts are sceptical the volumes under discussion will be enough to halt a near 50 per cent rally in oil since the start of the year, with demand rebounding sharply from the depths of the pandemic.
Saudi Arabia is looking to raise production only cautiously as persistent uncertainties caused by the coronavirus pandemic and new variants of the virus hang over policymakers.
But people close to the kingdom said its strongest motivation was that it did not want to see prices fall and would actually prefer them to be marginally higher, not just to provide the country with greater revenues but also because it believed more investment in the energy industry was needed.
Investment in the sector has dropped sharply in recent years, and traders and analysts are increasingly warning that could lead to prices jumping above $100 a barrel if supplies look likely to fall short in the coming years — a price level Saudi Arabia fears would ultimately prove damaging for its interests as it would accelerate the move away from oil.
The level of production increase under consideration is less than the 500,000 barrels a day discussed in recent months, though it is possible the final amount could rise under pressure from Russia, which is keen to maintain its market share.
“Maintaining price stability at high levels, while at the same time increasing its output, could be in the best interest of Opec+ today,” said Louise Dickson at Rystad Energy, a consultancy.
Brent crude, the international oil benchmark, extended its gains on Thursday, with the price rising more than 2.4 per cent to above $76 a barrel, close to the highest level since 2018. West Texas Intermediate, the US benchmark, reached $75 a barrel for the first time in almost three years.
Even as Opec delegates forecast stronger oil consumption in the latter half of 2021, they are worried about the trajectory of the virus, said Diamantino Azevedo, Angola’s petroleum minister, as the meeting of ministers got under way on Thursday.
Opec projects a “strong rebound of oil demand in the second half of the year”, Azevedo said. But he conceded the virus was still taking a “painful toll” on large parts of the world with “thousands of lives still being lost every day”.
“The presence of the new Delta variant and the recent surge in case numbers in India, along with other Asian countries, Latin America, the UK and, most recently, Russia and Africa are a grim reminder of the uncertainties that still loom over us,” he added.
Concerns about new variants mean ministers are considering keeping curbs on global supplies in place beyond April 2022, when the original deal to reduce supplies — agreed at the height of the pandemic last year — was due to end.
The so-called Opec+ group agreed in April 2020 to cut output by nearly 10m b/d or roughly 10 per cent of global demand as consumption of oil tumbled after governments imposed widespread lockdowns and travel bans. The group has already begun to phase out the curbs with current restrictions standing at just under 6m b/d.
“This strength [in prices] is due to comparison with the sharp drop we saw last year when the pandemic cut personal mobility in many countries,” said Ann-Louise Hittle at energy consultancy Wood Mackenzie.
“As shutdowns end in the largest consumer nations, such as the US and China, demand is returning to more normal levels each quarter.”
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