OPEC and Russia to Increase Oil Production

Saudi Arabia and Russia are discussing raising OPEC and non-OPEC oil production by some 1 million barrels a day.

This move has come weeks after #U.S. President Donald Trump complained about artificially high prices.  Trump tweeted last month that #OPEC had “artificially” boosted oil prices.

Raising production would ease 17 months of strict supply curbs. This comes amid concerns that a price rally has gone too far. The price of oil hit its highest price since late 2014. Brent reached $80.50 a barrel this month.

“We were in the meeting in Jeddah when we read the tweet,” OPEC Secretary General Mohammad Barkindo said. Barkindo spoke to a panel with the Saudi and Russian energy ministers in St. Petersburg at Russia’s main economic forum.

“I think I was prodded by his excellency Khalid Al-Falih that probably there was a need for us to respond. We in OPEC always pride ourselves as friends of the United States.”

The Organization of the Petroleum Exporting Countries and allies led by Russia had agreed to curb output by about 1.8 million barrels per day (bpd) through 2018 to reduce global stocks, but the inventory overhang is now near OPEC’s target.

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OPEC supply easing is more reset than U-turn

The usual problem with cartels is that individual members have an incentive to cheat. Since the cuts were agreed at the end of 2016, OPEC and its supplier friends have had the opposite problem. In April, they restricted output by over 2.4 million barrels per day, more than the agreed level of over 1.7 million barrels. On average, OPEC compliance has been 110 percent of the target, according to the International Energy Agency.

The combination of their cuts and steady demand has reduced the supply glut in developed markets. Furthermore, it has pushed oil prices close to $80 a barrel. Furthermore, lower costs due to the recent depreciation of the ruble will help state-owned Russian group Rosneft make money hand over fist. And higher prices prop up the Saudi budget and support the planned initial public offering of state group Aramco.

Nevertheless, the Russians and Saudis know that pushing the cost of the black stuff to $90 or beyond will be self-defeating. The desert kingdom will fear annoying U.S. President Donald Trump. Both countries will also be wary of giving U.S. producers an incentive to crank up production of shale oil.

This all comes at t time when Venezuelan output has slumped from 2 million barrels per day in early 2017 to below 1.5 million in April due to underinvestment. Renewed U.S. sanctions on Iran could remove as much as 800,000 barrels per day. Meanwhile, the Saudis have 2 million barrels of daily spare capacity. They could fill any gaps, increase its market share and still look like a sober steward of the oil market.  In that sense, the change of direction makes good sense.

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Oil Shares Fall

These events caused crude-oil futures to plunge. And the shares of energy-related companies fell hard this week, beginning on Tuesday afternoon.

Crude prices are up more than 12% so far this year, which has lifted the energy sector. The industry is up more than 9% since the start of April, supported in large part by the rally in commodity prices.

However, crude-oil futures tumbled 4% following the OPEC reports. And the Energy Select Sector SPDR ETF (XLE) fell 2.6% on Friday. For the week, the fund lost 4.5%.

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