The Organization of Petroleum Exporting Countries (OPEC) and its allies finally agreed to phase out their oil cuts by September 2022. On Sunday, OPEC agreed to phase out the oil cuts of 5.8 million barrels a day. This happened as oil prices hit their highest rates in the last two years.
Steadier Prices With Oil Cuts
For consumers, this means steadier oil prices as OPEC will produce more oil to keep up with the demands of a reopening economy. OPEC+, which includes both OPEC members and allies, will begin coordinating their increases in oil production beginning August, OPEC announced in a statement. Overall production will increase by 400,000 barrels per day every month.
Despite the projected increases, the International Energy Agency estimates that OPEC’s output will remain short by 1.5 million barrels per day for the rest of the year. This indicates that OPEC will remain tightly in control of the prices.
Oil Cuts Started Last Year
Last year during the height of the pandemic, OPEC+ began slashing its production output as demand for oil gradually faded to almost zero. The lockdowns imposed by governments worldwide suspended all non-essential manufacturing and transportation. Oil cuts neared 10 million barrels a day as OPEC tried to prevent the glut from getting worse. More than a year later, production is still down by 5.8 million barrels per day. With the world raring to get back on track, demand for oil rose.
Current prices reflect the effect of the oil cuts implemented by OPEC. International benchmark Brent crude remains up 43% year-to-date and up more than 60% from this time last year. Many analysts foresee oil prices to reach $80 a barrel in 2021. By Friday last week, Brent closed at $73.59 a barrel.
Disunity Among OPEC Members
Earlier this month, the organization had trouble agreeing on how to proceed with oil production given the reopening of the world’s economies. OPEC Member the United Arab Emirates rejected a coordinated oil production plan proposed by Saudi Arabia. Even as the group historically had some disagreements, this was the first time that the UAE publicly disagreed with the Kingdom.
Abu Dhabi demanded its own “baseline” for maximum crude production. This is the benchmark that OPEC will use to determine the production cuts and quotas for each member.
Having a higher baseline allows the UAE a greater production quota. The agreement confirmed that four OPEC members and one non-OPEC state will have production increased by May 2022.
These are the UAE, Saudi Arabia, Iraq, Kuwait, and Russia. The latter is not an OPEC member but an ally (OPEC+). The UAE’s baseline for oil production will rise from 3.16 million barrels per day to 3.5 million barrels per day.
This is short of the country’s demand for 3.8 million barrels’ production quota. In contrast, Saudi Arabia’s baseline increases from 11 million to 11.5 million barrels per day.
Watch Bloomberg Markets And Finance video reporting that OPEC+ Agrees to Boost Production Into 2022:
Do you agree with OPEC’s decision to phase out production cuts gradually? What do you think about OPEC and OPEC+ controlling production, which also dictates the price of oil?