The Organization of Petroleum Exporting Countries (Opec) and other oil-producing nations led by Russia is expected to back a modest increase in production by 500,000 barrels per day (bpd) in February and, potentially, by a similar amount in the following months, in the Opec + summit scheduled to be held next month. This decision comes at a time when global oil demand is still under pressure from the impact of the coronavirus pandemic.
Until recently, Saudi Arabia, the de-facto leader of Opec, and its Gulf allies, the United Arab Emirates (UAE) and Kuwait, held similar positions on production cutbacks. Saudi Arabia wanted to introduce production cuts of 7.7 million bpd into January-March 2021 amid a resurgent Covid-19 pandemic. However, countries like Russia, Mexico, Iraq, and later the UAE were against a cutback.
Russia and Saudi Arabia had previously engaged in a price war after the former refused to go along with the latter’s proposal in early March to cut back on output following a sharp drop in demand because of the coronavirus pandemic. With the coronavirus pandemic hitting the US full force, the country too was pushing on Saudi Arabia and Russia to agree on significant cutbacks on production. As storage spaces for oil began running out around the world an agreement between all Opec countries became impertinent.
Why did Russia and Opec agree on increased production?
This arrangement was a compromise between countries that wanted to proceed with a much larger increase of two million barrels a day, and others, led by Saudi Arabia, that preferred to maintain current production cuts, given the uncertainties rising from a raging pandemic. The government imposed travel bans and lockdowns all over the world had hit the oil market significantly.
Recent news about Covid-19 vaccine efficacy caused oil prices to climb to their highest levels since the crash in April. Seeing hope in those higher prices, some oil producers saw less need to keep a strict hold on supplies and wanted to increase pumping to try to make up for almost a year of dismal oil earnings.
Issues started to creep up when not all countries abided by decided supply cuts and continued to produce a surplus. Other countries whose economy can withstand a cut back in production have to step in to compensate, by further cutting back production to balance out the excess produced by some. Saudi Arabia and its Gulf allies at times, cut more supply than they had agreed to, to compensate for other Opec members who did not reduce as much as they had pledged. Bloomberg had reported in December that the UAE was making the biggest cuts to its production which frustrated the country’s leadership since the country had invested millions in expansion.
Fighting against Saudi Arabia’s push to cut supply was the UAE, which in recent days has grown increasingly vocal both within Opec and in international politics, and the UAE seems to be voicing against Riyadh, by resisting the bloc’s attempts to extend deep supply cuts into 2021.
As an inevitable future transition into cleaner energy comes closer oil-producing countries are getting impatient to pump out as much as they can while it’s still viable, and a pandemic is not enough to dampen their spirits.
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