Organization of Petroleum Exporting Countries (Opec) and its allies are likely to gradually revive oil output in the second half of the year to ease consumer anxiety as prices trade near $80 a barrel, said Saudi Energy Minister Khalid Al Falih.
The Saudi comments, echoed by Russia, mark a major shift in the historic alliance they forged in 2016 to end a global oil glut.
While the producers were determined just a month ago to keep supply restrained and boost prices, they’re now changing course as oil’s surge to a three-year high puts strain on the global economy and draws political heat from major consumers, notably the US.
On April 20, the president took to Twitter to lambaste the cartel’s push for higher prices. "Looks like Opec is at it again," he tweeted. "Oil prices are artificially High!"
Trump’s intervention gave typically strident voice to a concern held more widely in the US and other consuming countries: oil’s rally from less than $30 in early 2016 to more than $80 this month risked becoming a threat to global economic growth.
On Friday, Saudi Oil Minister responded, saying his country shared the "anxiety" of his customers.
He then announced this shift in policy that all but gave a green light for a market sell-off.
Speaking at the St. Petersburg International Economic Forum in Russia, Al Falih said: "I think in the near future there will be time to release supply" smoothly to avoid shocking the market."
When Opec, Russia and other major producers meet in June “we will do what is necessary” to reassure consumers, the minister added.
Al Falih spoke after talks with his Russian counterpart Alexander Novak, who said the output increase would start in the third quarter, if it is approved by other members of the group.
Both men said the size of the boost was still subject to negotiation.
Oil fell sharply following the comments, with Brent crude losing as much as 2.5 per cent to $76.84 a barrel as of 12:02 p.m. in London. The international benchmark is still up 15 percent this year.
The Opec and its allies have been cutting more than intended under the terms of their deal for several months. That’s partly because of unplanned losses in countries including Venezuela and Angola, but also because the Saudis have consistently cut deeper to demonstrate their determination to rebalance the market.
The producers are now discussing a plan to bring the cuts back in line with what they originally agreed, said people familiar with the matter.
They are still debating whether that would mean offsetting all the excess cuts made involuntarily in nations like Venezuela, or simply requiring individual members to move back in line with their own targets, which would entail a much smaller boost.
Ending deeper cuts by individual members would barely boost supply, while moving the group back to 100 per cent compliance in aggregate would add more than 700,000 bpd. Terminating the deal would increase output by about 1.3 million bpd.
The lower end of the potential increase, backed by Gulf producers including Saudi Arabia, would add just 300,000 barrels a day to the market, one person said. The more generous option favored by Russia would deliver an additional 700,000 to 800,000 barrels a day, the person said.
“Given current developments, with supply worries driving the price to $80, it would make perfect sense to remove the over-compliance by compensating for the shortfall from Venezuela,” said Ole Sloth Hansen, an analyst at Saxo Bank A/S in Copenhagen.
Excess cuts amounted to about 740,000 barrels a day in April, according to estimates from the International Energy Agency.
Without compensating supply from other members, this number looks likely to expand as the US re-imposes sanctions on Iran and the collapse of Venezuela’s oil industry worsens.