Saudi-Iranian OPEC Compromise Brings Hope for Lower Oil Prices

Energy Policy

Policy Focus

Gulf International Forum

Last Saturday, U.S. President Donald Trump agreed with Saudi King Salman to boost Saudi oil exports to 2 million barrels per day (bpd), the agreement came one week after OPEC’s 14-member nations held a long-awaited meeting following months of marathon oil diplomacy. The organization announced it had reached an agreement to increase oil production by one million (bpd), a compromise between Saudi Arabia (KSA) and Iran. The proposed production change is part of a Saudi-Russian scheme that aims to lower oil prices in response to increased demand from China and India, in addition to the US’s call for lower prices. Prior to the meeting, Iran and Venezuela rejected the proposal because of the perceived pressure from the U.S, calling for OPEC to be neutralized from politics. While KSA, Kuwait, and the UAE, (backed by Russia), considered the increase of output a crucial step in protecting oil markets from another price shock, the announced increase is a mild appeasement for the global demand of oil. If OPEC is serious about lowering prices, the announcement should be followed by further decisions addressing the global community’s full need.

Immediately after OPEC announced its decision the price of oil was up more than 2%, a jump that can be explained by two factors. First, the announced one million bpd increase was lower than expected and does not meet the oil market’s needs. Second, the real change in production would only be around 700,000 bpd since countries such as Iran, Iraq, and Venezuela cannot meet the new quota, either due to technical limitations or because of U.S. sanctions. The issue could be resolved if the individual quotas were made based on each member states’ capacity for a production boost. However, this detail was not decided upon, as according to the UAE Minister of Energy, it was expected to be too great a cause for disagreement.

The deal is significant because it began as a Saudi-backed Russian proposal for a 1.5 million bpd increase to meet the heightened worldwide demand. Immediately after the announcement, Russian Minister of Energy Alexandar Novak announced that Russia would improve its yield by 200,000 bpd while OPEC and non-OPEC countries are already planning an agreement for 2019. The Saudi-Russian harmony in oil pricing and industry policies appeared as a continuation of a historic 2016 deal when the world’s two largest oil exporters agreed to cut output by over 1.2 million bpd as part of their discussions to create 10 to 20 years of unified Saudi-Russian production to stabilize crude prices. The 2016 agreement stabilized prices for two years and resulted in a successful collaboration between OPEC and non-OPEC oil exporters. This was accompanied by Russian efforts to create the OPEC+ coalition of 24 oil producers to sustain oil price stability and unify drilling strategy.

For the time being, given that OPEC did not reach a deal to supply the market with its actual oil supply needs, there is a real risk that prices might spike in the next 12 months as demand continues to increase. In the last few years, oil demands have grown by 50%, a number that will continue to climb. Yet, while many of OPEC’s members are unable to meet the skyrocketing demands, the US has more production capacity than any OPEC member state. Although two main obstacles, pipeline constraints, and labor shortages, may inhibit the US’s ability to find a solution, any agreement of joint increase of supply between the U.S., Russia, and OPEC might be the easy answer to meet the increased international demand in order to stabilize prices.