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The Opec+ alliance has agreed to increase its collective crude production by 500,000 b/d in January, with any subsequent output adjustments to be decided at monthly ministerial meetings.
Today's agreement is a compromise between the group's original plan to increase output by nearly 2mn b/d from January and a proposal to roll over existing production quotas. Opec+ ministers have agreed that they will meet monthly in January-March to assess market conditions and decide on production adjustments for the following month. Any further increases in output beyond January will be capped at 500,000 b/d in each month. Production cuts are also possible.
"We could tweak upward, we could tweak downward, we could stay put. It is all about addressing uncertainty," Saudi oil minister Prince Abdulaziz bin Salman said. "Tweaking is nice. And flexibility is important," he said. "We are not in the business of gambling."
Russian deputy prime minister Alexander Novak, who co-chairs the group's Joint Ministerial Monitoring Committee (JMMC) alongside the Saudi oil minister, said the pace of Opec+ supply increases should be determined by the state of the market. "We believe that today's market is rather stable," he said.
It is not clear if the monthly quota-setting meetings will go on after March, but one delegate told Argus that the deal is "open" for the whole third phase of the current Opec+ output restraint pact, which runs from January 2021 until April 2022. Under the third phase, the alliance had planned to ease production cuts by almost 2mn b/d. But a worsening Covid-19 outlook in many regions, coupled with the rapid return of Libyan crude production since September, led the group to consider extending current collective cuts of 7.68mn b/d — largely from October 2018 baselines — into the first quarter of next year. Opec members were broadly in favour of this, but the rollover proposal faced opposition from the UAE and non-Opec participants Russia and Kazakhstan, forcing the group to discuss various other options ahead of and during today's meeting.
Quota-busters under pressure
Ministers have agreed that a compensation mechanism, which obliges quota-busters to make up for past overproduction with additional cuts, will continue until the end of March next year. While the compensation scheme is working, it is "not as successful as we were hoping", Prince Abdulaziz said. "I am also taking into account the issue that the UAE had raised, with regard to the lack of compensation from many other countries."
Russia, the largest non-Opec contributor to output cuts, has regularly failed to achieve full compliance, but it is close to reaching 100pc conformity, according to Novak. Russia's share of January's 500,000 b/d production increase will be around 125,000 b/d, he said.
Novak said he plans to meet the Saudi oil minister in person in the coming weeks to discuss market issues and business. Meanwhile, Saudi Arabia will remain chair of the JMMC, despite earlier this week floating the possibility of stepping down. "Three days ago I threw down the towel, but the towel comes back to me," Prince Abdulaziz said. "I see myself pulled between two strings. One string is to develop consensus. And the other is to be very focused on what the market requires."
