Saudi Arabia and its allies in the Opec+ alliance agreed to continue increasing monthly crude production, delivering a victory to consumer governments including the US that had called on the group to help push prices lower.
Oil prices initially fell on the announcement, which surprised a market that had expected the group of major producers to hold back supply amid fears the spread of the Omicron coronavirus variant will hit global oil demand. International benchmark Brent was down by 1 per cent on Thursday to about $68 a barrel, before rebounding to above $69.
The Opec+ group, which includes Opec members and other producers such as Russia, said it would increase supply in January by 400,000 barrels a day as previously planned. However, in an unusual move, it said the meeting would remain “in session”, suggesting Saudi Arabia, Russia and other large producers could intervene quickly to prop up prices if necessary.
Opec+ “will continue to monitor the market closely and make immediate adjustments if required”, it said.
The decision of Opec+ comes after weeks of pressure from the White House, which had called on the group to add more supply to cool prices that have risen sharply in the past year and fed fears of broad inflation in the US. President Joe Biden announced the largest-ever release of oil from America’s emergency stockpile last month in an attempt to drive down prices that had little immediate impact.
Then late last week, fears about the possible impact of the Omicron variant on the global economy resulted in a sudden, steep drop in oil prices, sparking speculation that Opec+ would cease the monthly production increases completely.
Analysts said Saudi Arabia’s decision not to intervene to halt the price drop suggested that geopolitical concerns had been a factor.
“There were broader issues at play at this Opec+ meeting and not just Omicron,” said Amrita Sen, director of research at consultancy Energy Aspects.
Opec’s own forecasts expect a considerable rise in oil stockpiles, she said, “so not pausing production suggests a political angle”.
An improvement in relations between Biden’s White House and the Saudi leadership may be part of the kingdom’s willingness to keep adding production, said people familiar with recent diplomatic discussions.
“While unexpected by the market, [the] Opec+ decision . . . is hardly a policy error,” said Bob McNally, head of Rapidan Energy Group and a former adviser to the George W Bush White House.
The decision “reflects the newness and huge uncertainties created by the [strategic petroleum reserve] releases and Omicron, the need to refill inventories early next year, and desire to dial down escalation with President Biden,” McNally said.
West Texas Intermediate, the US oil benchmark, also fell after the news before recovering on Thursday. It was recently trading at trading under $66 a barrel, down 16 per cent since the middle of last week.
Opec+ has been increasing oil total production each month since August as it gradually replaces the huge swaths of supply it slashed as the pandemic shattered oil prices last year.
Until the detection of the Omicron variant last week, the group had been under mounting pressure to accelerate that process amid warnings of a growing deficit between supply and demand.
“The sudden appearance of a potentially new and more dangerous variant comes on top of new lockdowns in parts of Europe aimed at reversing a dramatic infection surge, especially in unvaccinated populations,” said Diamantino Azevedo, Angola’s minister of mineral resources and petroleum, at the opening session of the Opec meeting on Wednesday.
“In these uncertain times, it is imperative that [Opec and its allies] remain prudent in our approach and prepared to be proactive as market conditions warrant.”