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The headquarters of the Organization of the Petroleum Exporting Countries in Vienna.
Akos Stiller / Bloomberg
OPEC will gradually increase production starting in January as part of a pledge aimed at allowing its members to benefit from rising prices without flooding the market.
Instead of adding 2 million barrels a day to production, or just over 2% of world production, the Organization of the Petroleum Exporting Countries and its allies, including Russia (known as OPEC +), will add 500,000 barrels a day. In the following months, the cartel will revise that rate and may increase production further, depending on demand.
So far, traders seem optimistic about the deal. Futures for Brent crude, the international benchmark index, rose 1.2% to $ 48.83 a barrel on Thursday. West Texas Intermediate futures rose 1% to $ 45.75 a barrel. West Texas oil has rebounded in recent weeks, rising to the mid-$ 40s from $ 30. That has seen many industry stocks rise by at least 10%, with the expectation that they can get positive free cash flow with prices at these levels.
The decision was “reasonable, logical, economically sound, even unavoidable, but difficult to come by,” wrote Andy Brogan, EY’s world oil and gas leader. “If they didn’t, supply would soon exceed demand and add to already growing inventories. We saw this in the spring and it didn’t go well. “
Analysts had expected OPEC to delay its production increases for a few months. But some OPEC members were against keeping production low, as prices have improved and they would like to make more money. That raised concerns that OPEC would increase production and flood the market with oil, causing prices to fall. Oil prices fell on Tuesday when it became clear that the group would not come up with an easy answer.
Given the disputes, the final compromise “is not the nightmare scenario that the market feared,” wrote Paola Rodríguez Masiu, an analyst at Rystad Energy. “If oil prices had not fallen earlier this week, such an increase in production would nevertheless cause a drop in prices. But in the face of a no-deal, a small raise isn’t bad news after all. “
However, the future of this deal depends on how demand returns as the vaccines are rolled out.
“With Covid vaccines starting this month, expectations are high for virus lockdowns to improve in January and steadily as vaccines are produced and distributed. OPEC + will decide monthly how much more oil should be in line, “wrote Oanda analyst Edward Moya.
“If the global economic recovery is stronger than expected, a terrible performance can be expected next year and eventually the OPEC + pact will be terminated,” he added.
Write to Avi Salzman at [email protected]
