OPEC, Russia and other oil major producers reached an unusual agreement on production quotas on Tuesday, with Saudi Arabia committing to reducing its oil production by one million barrels a day and Russia and Kazakhstan winning relatively modest production increases.
The effect will be an overall reduction in oil production. The news pushed prices up more than 4 percent, reaching levels not seen since February. Brent crude rose past $53 a barrel, and West Texas Intermediate exceeded $50 as traders welcomed the Saudi willingness to give up some barrels in an effort to stabilize the market.
The difficulty in reaching consensus at the meeting of the OPEC Plus group appeared to show that cooperation between Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, and Russia is once again under considerable strain. That tension could be a harbinger of difficulties in restraining production in the coming months.
Finding that they were unable to head off Russia’s demand for a production increase, Saudi Arabia appears to have largely given in to preserve at least a semblance of unity.
“Instead of letting everything fall apart, the Saudis let the Russians have what they want,” said Bhushan Bahree, an executive director at IHS Markit, a research firm.
Russia will now be permitted to raise production by 65,000 barrels a day in February and by another 65,000 a day in March, bringing output to over 9.2 million barrels a day.
At the same time, to prop up the market, the Saudis volunteered to cut production by one million barrels a day — the equivalent of about 1 percent of world supply — to about 8.1 million barrels a day. That pledge came late and was not reflected in quota numbers published by OPEC after the meeting. The Saudis had been producing more than 11 million barrels a day at the peak of a price war with Russia last spring.
“This was a homegrown idea,” Prince Abdulaziz bin Salman, the Saudi oil minister, said during a news conference after the meeting. The prince said Saudi Arabia was making a gesture of “good will.”
The group met by video beginning Monday to consider an increase in February of around 500,000 barrels a day, following a similar boost this month.
The Russians wanted more output. They have argued that unless OPEC Plus keeps pace with the recovery of demand, the group will lose market share to shale oil producers in the United States. The Russians also appear to be more sanguine about the world economy and the recovery of demand for oil.
The Saudis urged caution, with the pandemic still far from under control. They have been wary of easing the production cuts agreed to by the group in April that helped bring prices back from their spring lows.
Before that deal and facing falling demand for oil amid the first wave of the pandemic, Saudi Arabia and other producers tried to force Russia to agree to a big cut in production. When Russia objected, the Saudis increased production and cut prices, triggering a panic among traders in April that eventually caused the price of West Texas Intermediate to go negative.
The dynamic, though, had changed with the April deal that ended the price war. Saudi Arabia and Russia had been moving in lock step, with identical production quotas.
“Do not put all that we have achieved at risk for the sake of an instant but illusory benefit,” Prince Abdulaziz, who also chairs the OPEC Plus meetings, said at the beginning of the conference.
Unable to come to an agreement on Monday, the big producers, led by the Saudis, figured that they had better reach some compromise on Tuesday or risk spooking traders still wary of the price war.
The Saudis and other OPEC countries remain worried about the outlook for their oil. OPEC Plus released a statement after the meeting, noting the “shocking impact of the Covid-19 pandemic on the world economy and markets.”
“Rising infections, the return of stricter lockdown measures and growing uncertainties have resulted in a more fragile economic recovery that is expected to carry over into 2021,” the statement said.