Time to increase oil production? OPEC+ to meet to decide

Officials from OPEC, Russia and their allies are meeting by videoconference Thursday to consider whether the strength and durability of the recovery of oil demand warrants an increase in oil output.

For more than a year, this group of producers, known as OPEC Plus, has kept a tight grip on oil production, helping to lift prices by around 85% since November to about $75 a barrel for Brent crude, the international bench mark, and $74 a barrel for West Texas Intermediate, the US standard.

Analysts expect a gradual easing, perhaps over months, saying the markets are likely to welcome offering customers more oil as long as the approach looks disciplined. OPEC Plus members are keeping around 6 million barrels a day of potential production known as spare capacity in the ground, and a major question is how to gradually release this oil without depressing prices.

“Traders expect a supply increase from OPEC Plus, but in a cautious manner that does not prematurely recall too much supply too soon,” said Rystad Energy, a consulting firm, in a note Thursday.

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Some of the group’s members, including Russia and the United Arab Emirates, are expected to lean toward increasing production at a time when oil consumption is rising as economies recover from the pandemic.

Some oil officials also worry that keeping tight controls on production can be counterproductive because relatively high prices — some analysts are projecting they could eventually reach $100 a barrel — will encourage competitors like shale oil drillers in the United States to increase output, cutting into the market share of the OPEC Plus countries.

On the other hand, Saudi Arabia, the world’s largest oil exporter, is known to favour caution. If the economic recovery stumbles because of new variants of the coronavirus, for instance, an oversupply of oil could force prices to drop.

Oil officials will also be keeping in mind the potential for an output increase later this year and in 2022 from Iran, an OPEC member. Iran is engaged in indirect talks with the United States on resuming the nuclear deal that former President Donald Trump abandoned. If successful, these negotiations could lead to a lifting of the US sanctions that have crimped Iran’s oil sales.

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On Wednesday, Mohammad Alfares, the oil minister of Kuwait, a close ally of the Saudis, said that OPEC Plus was “cautious with regard to the strategy of raising production amid the challenges of the oil markets.”

The Saudis have previously agreed to a gradual increase of about 2 million barrels a day — about 2% of world supplies — from May through July.

Helima Croft, an analyst at RBC Capital Markets, an investment bank, said in a recent note to clients that OPEC Plus may approve an increase in production of 500,000 barrels a day to up to 1 million barrels a day, beginning in August.

Croft said that such “a modest turn of the taps should be palatable to all the parties involved.” And OPEC Plus can always backtrack rapidly through the monthly meeting schedule it has adopted during the pandemic.