Opec and its allies have agreed one of the smallest oil production increases in the group’s history as Saudi Arabia attempts to appease western allies without using up all its unused capacity.
The increase agreed on Wednesday of just 100,000 barrels a day, or 0.1 per cent of global demand, is likely to cause disappointment in western capitals, after presidents Joe Biden of the US and Emmanuel Macron of France met Saudi Arabia’s crown prince Mohammed bin Salman separately in recent weeks.
Saudi Arabia has warmed to a small production increase as it attempts to utilise oil diplomacy to rehabilitate Prince Mohammed after western allies had distanced themselves following the murder of journalist Jamal Khashoggi in 2018.
But it is also balancing its relationship with Russia, which has partnered since 2016 with the Opec group that Saudi Arabia leads. Moscow has been hit with a series of sanctions targeting its oil exports that go into effect later this year in response to its full-scale invasion of Ukraine. There are concerns that the kingdom and its Gulf allies such as the United Arab Emirates will not be able to replace the expected shortfall in Russian output.
“Saudi Arabia is trying to balance calls from its western allies for higher oil production against the need to keep its spare capacity in reserve in case output falls sharply elsewhere in the coming months,” said Christyan Malek, analyst at JPMorgan.
“This small increase will not materially change the balance of the market but they cannot be accused of doing nothing,” he said
Brent crude, the international benchmark, rose 1.5 per cent to $102 a barrel as news filtered out from the meeting, though prices have come down in recent weeks from about $120 a barrel in early June.
Petrol prices in the US, a focus for Biden ahead of midterm elections in November, have followed crude south, but there are concerns in Washington that prices could start heading higher again.
While Biden is seeking lower prices at the pump, the Gulf states have been looking for more military support and co-operation from Washington.
On Tuesday the US state department, which has been leading Biden’s efforts to lower energy prices globally, approved the potential sale of missiles needed to rearm US-supplied defence systems in Saudi Arabia and the UAE.
Two people with knowledge of the matter said Saudi Arabia was concerned about securing grain supplies for the wider Middle East, with rising prices and warnings of potential shortages feeding Riyadh’s fear of another spate of popular uprisings in the region such as those of 11 years ago.
One person said Macron was trying to broker an arrangement to ensure wheat and grain supplies, which he discussed with the crown prince in Paris last week, while pushing for higher oil output.
Opec+ is also concerned about the risk of a recession, with signs that oil demand has started to cool in response to high energy prices and a wider cost of living crisis that has roiled the global economy.
Saudi Arabia is already pumping close to 11mn b/d of crude; its maximum capacity is about 12mn b/d. There are questions in the oil industry over how long that level could be maintained.
The country’s energy minister Prince Abdulaziz bin Salman, the half-brother of the crown prince, has emphasised cohesion within the group but that is becoming more challenging.
Many Opec members are already struggling to hit their own production targets after years of under-investment and mismanagement, and so would not stand to benefit from higher volumes and may lose out if prices fall.
Russia, which has grown more dependent on its relationships in the Middle East as western powers have sought to isolate Moscow, agreed that Opec+ should accelerate production increases in July and August as they unwound the last of the production cuts made at the height of Covid-19 lockdowns.
The G7 said on Tuesday that it remained committed to trying to cap Russia’s oil revenues in response to its invasion of Ukraine. Sanctions targeting Russia’s ability to export its oil are expected to come into force this year unless a deal to sell its oil at below market rates can be agreed, helping keep global markets well supplied while limiting revenues flowing to the Kremlin.
Additional reporting by Sarah White in Paris and Tom Wilson in London
