'OPEC+ Blocks Large-Scale Production Increase, Plans to Raise Daily Output by 500,000 Barrels Next Year (Comprehensive)'

Saudi-Russia Agreement
Production Cut Adjusted from 7.7 Million Barrels per Day to 7.2 Million Barrels in Q1 Next Year
Monitoring Compliance with Agreement
Monthly Market Review Planned... Flexible Adjustment of Oil Output Allowed
Q2 Production Volume to Be Discussed Early Next Year

[Asia Economy Reporter Naju-seok] OPEC+ (Organization of the Petroleum Exporting Countries (OPEC) member countries and non-OPEC allies) held a meeting on the 3rd (local time) and agreed to increase crude oil production by 500,000 barrels per day in the first quarter of next year compared to the current level. This was a compromise between Saudi Arabia's demand to maintain the current level and Russia's demand to increase production.

According to the Wall Street Journal (WSJ) on the same day, OPEC+ member countries discussed the crude oil production volume for the first quarter of next year through a video conference and reached this agreement. Accordingly, OPEC+'s production cut scale will be reduced from 7.7 million barrels per day to 7.2 million barrels per day. According to the original OPEC+ agreement in April this year, the production cut scale was supposed to be reduced to 5.8 million barrels per day starting January next year.

[Image source=EPA Yonhap News]

Initially, there was tension surrounding this agreement. The OPEC+ meeting was originally scheduled for the 1st, but even within OPEC, no consensus was reached, forcing a sudden change in schedule. The market, which feared that oil-producing countries would clash again over the production cut scale, showed an upward trend as the agreement was reached. On the New York Mercantile Exchange (NYMEX), West Texas Intermediate (WTI) crude oil for January delivery next year closed at $45.64 per barrel, up 0.8% ($0.36).

Some oil-producing countries, including Saudi Arabia, expressed concerns about the rapidly spreading novel coronavirus disease (COVID-19) in the US and Europe and argued that the current production cut scale should be maintained early next year. On the other hand, there was significant opposition, citing the expected global economic rebound next year due to COVID-19 vaccine development and the possibility that US shale companies would benefit if oil-producing countries delayed increasing production. In particular, Russia and Kazakhstan, which are not members of OPEC, strongly advocated for production increases.

Moreover, there were also issues raised about the proper implementation of the agreement within OPEC+. The United Arab Emirates (UAE) raised concerns about oil-producing countries violating their assigned production cut quotas and supplying more oil to the market than agreed.

[Image source=Reuters Yonhap News]

Helima Croft, Head of Global Commodity Strategy at RBC Capital Markets, said, "The key issue is whether oil-producing countries can increase production as agreed," adding, "Iraq and Nigeria are already releasing their existing oil into the market." The implementation of the agreement among oil-producing countries is crucial.

Despite these differences, the oil-producing countries chose a compromise. On the surface, the conflict appears to have been resolved, but as confirmed during the meeting process, significant conflicts remain visible within the oil-producing countries.

The crude oil production volume for the second quarter of next year will depend on the meeting in February next year.

OPEC+ also plans to review market conditions monthly after January next year. This is to respond more flexibly to supply and demand situations. Russian Energy Minister Alexander Novak said, "After January, production policies will be adjusted monthly within the range of not exceeding 500,000 barrels per day," adding, "We are considering market conditions," and "Production volume can be adjusted in any direction." Saudi Oil Minister Abdulaziz bin Salman stated regarding this agreement, "The agreement can be adjusted anytime as needed."

There is also a forecast that price volatility may increase as speculative demand gathers due to the frequent OPEC+ meetings.