OPEC Plus Agrees on Oil Production Increase, Easing Pressure on Supplies and Prices

The pact clears the way for the group to pump more oil as global economies revive from pandemic lockdowns.

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Major oil producers reached a deal on Sunday to increase production, a move that could help ease the pressure on gas prices and inflation as economies around the world recover after pandemic lockdowns.

The pact by OPEC Plus, as the group is known, aims to begin pumping more oil beginning next month. It resolved a dispute between the United Arab Emirates and Saudi Arabia that had blocked an agreement earlier this month and caused oil prices to spike, briefly hitting six-year highs on July 6.

Even before that, gasoline prices in the United States had been steadily rising. The average price of a gallon of regular gasoline in the United States is now $3.17, according to AAA. A year ago, as pandemic lockdowns kept people close to home, gas cost just $2.18 a gallon on average. And the higher gas prices have been adding to inflation, a key measure of which climbed at the fastest pace in 13 years in June.

Under the deal announced on Sunday, OPEC Plus, a group of 23 nations led by Saudi Arabia and including Russia, will increase output each month by 400,000 barrels a day, beginning in August. That will add about 2 percent to the world’s supply by the end of the year. The group accounts for roughly 40 percent of the world’s crude oil.

In its news release, OPEC Plus referred to “the ongoing strengthening of market fundamentals, with oil demand showing clear signs of continued improvement.” It was an apparent change in tone from the ultra-cautious approach taken previously by the group’s chairman, Prince Abdulaziz bin Salman, the Saudi oil minister.

As the world economy rapidly reopens and suppliers strain to keep up with demand, commodities, including oil, have jumped in price. OPEC Plus, for its part, has been withholding millions of barrels a day in potential oil production from the markets.

While some analysts expect the deal will help ease oil prices, with gasoline in the United States likely to follow suit, they still expect oil markets will remain tight in the coming months.

Gas prices are a politically potent and highly visible symbol of inflation. President Biden has felt pressure to address the rising costs, but he walks a fine line. He wants to gradually wean the United States off oil and gas, but at the same time he does not want fuel prices to rise so quickly that they put the brakes on the economic recovery.

“Today’s deal will likely please the White House, which has worried not only about the impact of higher gasoline prices on U.S. consumers but also about a major rift between its key regional allies as it seeks to build a grand producer coalition to tackle climate change,” wrote Helima Croft, head of commodities at RBC Capital Markets, an investment bank, in a note to clients on Sunday.

Gary Ross, chief executive of Black Gold Investors, an oil trading firm, agreed. “The U.S. has to be quite happy with the agreement,” he said. “It shows that OPEC is going to increase supply to meet rising potential demand.”

Where prices go from here is a matter of intense debate. Some analysts say that even with more oil from OPEC Plus, markets are likely to remain tight in the coming months. Brent crude, the international benchmark, closed at a little over $73 a barrel on Friday. Goldman Sachs forecasts that it could reach $80 a barrel this summer, and other forecasters say that reaching the $100 mark in the coming years is a distinct possibility.

Other analysts say there is plenty of potential supply that could be unleashed to cap any price rises. “There is a huge amount of spare capacity in the OPEC Plus countries,” said Michael Lynch, a distinguished fellow at the Energy Policy Research Foundation in Washington. Mr. Lynch says that the recent highs in oil prices may turn out to be a peak for some time.

Tom Kloza, global head of energy analysis for the Oil Price Information Service, a data provider, said that gasoline prices could head down later in the year when demand falls unless hurricanes cause refinery outages. “By and large prices will be lower on a nationwide basis than what we are seeing now,” he said.

Whether OPEC Plus can hang together despite the major changes occurring in the energy markets is another question. The Saudis essentially gave in to the Emirates, letting their Persian Gulf neighbor have the increase in its production quota that it was seeking, although not until after next April. Other countries, including Kuwait, Iraq, Saudi Arabia and Russia, will also be granted increases in the baselines from which their production limits are calculated, according to OPEC’s statement.

The group did yield to a Saudi request to extend the overall production agreement through the end of 2022.

The agreement ended a standoff between Saudi Arabia, the de facto leader of the cartel, and the Emirates, which has invested heavily in expanding oil production and has chafed against the group’s limits on output.

“We are here to stay,” Prince Abdulaziz, the Saudi oil minister, said during a news conference after the meeting. “What bonds us together is way beyond what you imagine.”

What matters about this agreement is not the production numbers — which can be changed by monthly reviews — but that the organization was able to reach a consensus under trying circumstances, said Bhushan Bahree, an executive director at IHS Markit, a research firm.

“The important thing is that they faced a problem, and they overcame it,” Mr. Bahree said.

Other tests, though, are likely to come as subsequent meetings present opportunities for negotiation. The dispute with the Emirates could be a harbinger of changes that may drive wedges between the different members of the group.

The environment that OPEC has long operated in is changing. The organization’s calculation has been that seeking higher prices by restraining production was a smart strategy because there would always be demand for the vast resources its members still have in the ground.

Climate change has upset that long-range outlook. The deadly floods in Europe this week are just the latest weather catastrophe prompting lawmakers to call for more stringent rules on greenhouse gas emissions. Some countries that rely on fossil fuels as a major source of government revenue may seek to turn their reserves into cash while they still can. Over time, that could lead to more production that could drive prices down.

“This latest OPEC bust-up highlights important changes in oil marketing strategy that are starting to spread across the global oil patch,” said Jim Krane, a fellow at Rice University’s Baker Institute.

The United Arab Emirates, whose oil production is dominated by the emirate of Abu Dhabi, has for some time been moving in a direction likely to lead to differences with the rest of OPEC.

The emirate’s government is investing heavily in the Abu Dhabi National Oil Company, bringing in international companies to explore and develop new resources and bolster activities like refining and the trading of oil products.

The leadership of Abu Dhabi increasingly saw the country’s quota of about 2.7 million barrels a day as both unfair and not in the national interest. The national oil company’s production capacity has already reached about four million barrels a day and is heading toward five million barrels a day.

Like other OPEC members, the United Arab Emirates leadership is also disgruntled about the changed dynamics in OPEC since 2016, when Saudi Arabia brought Russia in as a top associate in what has now become OPEC Plus. As happened earlier this month, important moves are often worked out between Riyadh and Moscow, leaving other members little choice but to come on board. This arrangement has grated on some members, particularly the Emirates, a neighbor and traditionally a close ally of the Saudis.

In early July, the Emirates’ oil officials made their displeasure clear during a series of OPEC Plus meetings. Suhail al Mazrouei, the U.A.E.’s oil minister, insisted that the country’s quota should be calculated from a higher baseline than the one set in April 2020, in an emergency deal at the beginning of the pandemic.

The Saudis balked, saying that a new quota for one member would lead to others demanding changes.

Evidently, both countries realized that at this time they are better off reaching a compromise. Despite the focus on Russia, Saudi Arabia did not want to risk losing the presence of a big producer like the United Arab Emirates in the organization.

The oil world, though, is changing. Mr. al Mazrouei said at the news conference that while his country was happy with its new deal, he noted that it would run until the end of next year — not indefinitely.

“Anything beyond that I think we all as countries will talk about it,” he said.

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