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OPEC proposes pact to raise oil production despite Iran walkout

The Joint Ministerial Monitoring Committee, which includes Russia and Saudi Arabia, recommended a supply boost despite the Iranian oil minister walking out of the meeting.

business Updated: Jun 22, 2018 16:01 IST
Oil prices,OPEC,OPEC meet Vienna
OPEC and its allies reached a preliminary agreement in the face of strong opposition from Iran to boost production by a theoretical 1 million barrels a day - the actual increase will be smaller as several countries are unable to raise output. (Stefan Wermuth/Bloomberg)

Despite strong opposition from Iran, OPEC and its allies have come to a preliminary agreement to raise production by a theoretical 1 million barrels a day. However, the actual increase will be smaller as several countries are unable to raise output.

In a night of drama in Vienna, the Joint Ministerial Monitoring Committee, which includes Russia and Saudi Arabia, recommended a supply boost despite Bijan Namdar Zanganeh, the Iranian oil minister, walking out of the meeting and predicting that OPEC won’t convince him to back the increase.

Iran could wield a veto over any formal deal on Friday, but such a move wouldn’t necessarily prevent additional oil coming onto the market. Riyadh could seek to assemble a coalition of countries that are ready to pump more within their existing agreement, act unilaterally to boost output or abandon the 2016 cuts deal entirely.

Zanganeh’s dissent reflects that Iran’s petroleum industry is coming under fresh US sanctions. The restrictions imposed after President Donald Trump unilaterally withdrew from an international accord over Iran’s nuclear program, could significantly curb the country’s oil exports. Saudi Arabia has enough spare capacity to offset those losses and keep a lid on prices, but Energy Minister Khalid Al-Falih acknowledged on Thursday that such a move isn’t politically palatable for his fellow OPEC members.

“From the Iranian stand point, an OPEC decision to boost output facilitates [is] an aggressive US policy against Tehran,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York and a former Obama administration oil official.

Consumers are clearly demanding more supply for the second half of the year and the Organization of Petroleum Exporting Countries and its allies should heed their call, Al-Falih said. Still, the kingdom’s desire to preserve the hard-won unity in the group of 24 oil producers has resulted in a convoluted mechanism for satisfying that need.

“One million barrels a day is nominal,” Al-Falih told reporters when describing the increase recommended by the committee meeting on Thursday. “What actually is delivered to the market is going to be a smaller number.”

The real production increase would be around 600,000 barrels a day, a delegate familiar with OPEC’s internal calculations said. Among members of the group, Venezuela is all but certain to be unable to boost output as its oil industry collapses. Outside OPEC, Mexico is unlikely to be able to pump more.

OPEC would need to ratify the recommendation on Friday at its formal meeting. It’s not uncommon for the cartel to deviate from a preliminary agreement. It’s all possible that they could find a last-minute compromise that would resolve Iran’s opposition. The cartel will meet again on Saturday with non-members, including Russia, that are part of the original deal to curb supplies.

Historic agreement

In an historic agreement in late 2016, the OPEC+ group of 24 nations decided to cut 1.8 million barrels of production to revive the oil market from its biggest slump in a generation. Outages in some nations and deeper-than-agreed cuts by others have made the actual reduction larger by about 1 million barrels a day.

The Iran walk-out shows the tension within OPEC after the US, China and India put pressure on the cartel to boost production to ease the pain of high oil prices. Brent crude last month surged to a more than three-year high above $80 a barrel. It was up 1.3% at $73.98 a barrel at 7.58 am in London on Friday.

“Our customers have spoken loudly and we must listen to them,” Al-Falih said before the ministerial talks on Thursday. He warned his fellow oil producers about the rising consumer anxiety and the potential for high prices to have a negative impact on demand.

The upbeat Saudi comments contrasted with the somber tone of the Iranian delegation. “It wasn’t a good meeting,” Zanganeh told reporters after walking out little more than 30 minutes after the gathering got under way. “There were proposals but I don’t think we can reach an agreement.”

The talks in the Austrian capital were the latest steps in a process that has whipsawed oil markets for weeks. Saudi Arabia and Russia’s desire to roll back production cuts has encountered fierce opposition from Iran and Venezuela, while US President Donald Trump has lobbed the occasional rhetorical bomb on Twitter at the cartel on behalf of consumers.

“This is the most geopolitically complex meeting that OPEC has ever had,” said Daniel Yergin, vice chairman of consultant IHS Markit Ltd.

First Published: Jun 22, 2018 14:15 IST