Opec+ agrees to bigger increase in oil supply but prices keep rising

NEW YORK (NYTIMES) - The group of oil-producing nations known as Opec+ agreed on Thursday (June 2) to a larger increase in supply than planned for July and August.

The White House hailed the higher output as a diplomatic breakthrough after months of lobbying Middle East oil giants to raise production to ease price pressures. Administration officials said on Thursday that President Joe Biden would visit Saudi Arabia, which effectively leads Opec+, later this month.

His trip could signal a thawing of relations between Mr Biden and Saudi Crown Prince Mohammed bin Salman after Mr Biden vowed during the 2020 election campaign to turn Saudi Arabia into a "pariah" state because of the assassination of a critic of the Saudi government.

News of the trip suggests that the United States President is seeking to work with the Saudis on a number of fronts, including to tame rising fuel prices as inflation becomes a major problem for Mr Biden and the Democratic Party in the midterm elections.

But it is not clear how far Saudi Arabia is willing or able to go to help Mr Biden on oil prices. The amount of added crude oil that the Organisation of Petroleum Exporting Countries and its allies committed to produce is unlikely to cause petrol prices to fall. In fact, the price of oil rose after the announcement on Thursday.

Oil prices, which had fallen about 3 per cent before the meeting as traders anticipated a significant increase in production, reversed direction after the Opec+ announcement, with West Texas Intermediate crude, the US benchmark, up more than 1 per cent to about US$117 a barrel.

After a videoconference, the group said it would raise production by 648,000 barrels a day in July and then again in August, an increase of about 50 per cent over the monthly rise set under a programme last year. Effectively, what Opec+ is doing is compressing three months of planned increases into two months.

But the Opec+ member countries are not expected to generate that output when the time comes. Many of the producers have already run out of additional production capacity. Only Saudi Arabia, the United Arab Emirates and one or two other countries have more oil to add.

Whatever they add risks being offset by what happens in Russia. Russian production is in decline in the wake of Western sanctions imposed after the invasion of Ukraine. According to the International Energy Agency, Russia is producing about 15 per cent less than its target of 10.8 million barrels a day for July. Further decreases in Russian output are expected later this year as the European Union's effort to stop most Russian oil purchases takes effect.

While the amount of additional oil will not be large, some analysts said the fact that Opec+ was willing to depart from its previous routine could be the beginning of a breakthrough, leading to more cooperation from Saudi Arabia and other countries like the UAE as sanctions reduce Russian output.

Until recently, these countries have insisted that they could not depart from the schedule agreed by Opec+ in July. The break comes after diplomatic work by Mr Amos Hochstein, the Biden administration's energy envoy, and other diplomats.

"It is more important to see this in terms of the political signal it sends than the actual number of barrels it adds," said Mr Bill Farren-Price, the head of macro oil and gas research at research firm Enverus. It suggests, he said, that Saudi Arabia "may be more prepared to boost supply" as sanctions further reduce Russian production.

With growing constraints on Russia's production and exports, a reordering of the world energy market is under way. The Saudis and other Opec+ members with additional oil to produce could benefit. On the other hand, some analysts said that even the Saudis and the UAE may be approaching the limits of how much oil they can produce.

Too big of a burden is probably being placed on Opec+ "to offset the economic damage caused by a war" involving Russia, an enormous commodity exporter, RBC Capital Markets analyst Helima Croft wrote in a note to clients after the meeting.

Opec+ suggested in a news release that it was responding to a reopening from lockdowns in countries such as China. There was no mention of pressure from Washington for an increase in supply to address rising prices.

The Saudis are also trying to improve their relationship with the Biden administration, but they do not seem to want to break their five-year alliance on oil matters with Moscow, a co-leader of Opec+.

"They are not going to abandon Russia," said Ms Amrita Sen, the head of oil markets at research firm Energy Aspects, referring to the Saudis. "They are doing a little bit at the request of the US. That is all this is."