Saudis, Russia in Tentative Deal for Gradual Oil-Output Hike

(Bloomberg) -- Saudi Arabia and Russia reached a tentative agreement to gradually increase OPEC+ oil output, but prices kept rising as the cartel looked set to keep a firm grip on supply.

Negotiations over the details of the supply hike are still underway, delegates said, asking not to be named because the information is private. The proposal under discussion would add about 2 million barrels a day to the cartel's output from August to December, they said.

Oil prices rose, jumping above $75 a barrel in New York for the first time since 2018, as the outlines of the deal suggested OPEC+ was sticking to its policy of keeping the market tight even as concern grows about rising inflation.

“The price reaction says everything,” said Giovanni Staunovo, a commodity analyst at UBS Group AG. “The supply increase would be less than market participants expected and demand is still expected to rise into August.”

Implementation of the agreement would be conditional on the status of talks between Iran and the U.S., which are seeking to revive their nuclear pact and potentially lift sanctions on the Islamic Republic's oil exports, delegates said. The deal would also extend the expiry date for the overall OPEC+ cuts agreement from April to December 2022, a delegate said.

Ministers from the Organization of Petroleum Exporting Countries adjourned their first round of online talks on Thursday, giving time for Moscow and Riyadh to finalize their accord, according to a delegate. The group is scheduled to hold two more video conferences with their non-OPEC allies later in the day. Their evolving debate has big implications for the oil market and the broader economy.

Crude has risen around 50% this year, with the recovery in demand from the pandemic outpacing the revival of OPEC+ supplies after last year's deep cuts. Oil's surge, combined with a rally in other commodities, has central banks fretting about inflation again. It also shows how Saudi Arabia and Russia are back in the driving seat of the global energy market -- a remarkable comeback from negative prices just over a year ago.

Oil extended gains in New York, rising 2.1% to $75.01 a barrel as of 10:16 a.m.

Gradual Revival

OPEC+ is already in the process of reviving crude supplies halted last year in the initial stages of the pandemic. The 23-nation coalition decided to add about 2 million barrels a day to the market from May to July, and the question before ministers now is whether to keep going next month.

Yet the market has experienced a supply deficit for much of this year as the group's output increases didn't keep pace with the demand recovery. In the cartel's view, that's been an entirely necessary remedy -- the only way to deplete the vast surplus in fuel stockpiles that accumulated as economies went into lockdown.

Now, the group's data show oil inventories are back down to average levels as a strong revival in fuel consumption continues. Demand in the second half will be 5 million barrels a day higher than in the first six months of the year, OPEC Secretary-General Mohammad Barkindo said on Tuesday.

Risk Factors

Yet there are several factors that could undo the rally.

There's the risk of a supply influx if the U.S. reaches a nuclear deal with Iran. The highly infectious delta variant of Covid-19, which is already sending some countries back into partial lockdown and triggering a worrying rise in cases in other nations, threatens the demand recovery.

The cartel also faces the danger of a backlash from major consumers -- including the U.S. -- if oil keeps rising. Dharmendra Pradhan, minister of petroleum and natural gas for India -- the world's third-biggest crude importer -- told OPEC officials last week that high prices were “adding significant inflationary pressure.”

“The last thing Saudi Arabia and the United Arab Emirates, even Russia, want is $85 a barrel, much less $100 a barrel,” Bob McNally, president of Rapidan Energy and a former White House official, told Bloomberg Television on Thursday. “So far in Washington, it's been quiet. As we get closer to $80 a barrel, it'll set off alarm bells” about the risk it poses to the economic recovery, he said.