Faced with a tricky scenario, the world’s largest crude exporter Saudi Arabia has been under immense pressure from all around, including Washing­ton, to act and increase output. But there was stiff resistance too. For the Kingdom to open taps, also risked alienating some members of the group. A balancing act was thus required.

And exactly that happened this Friday, when after a heated debate inside the closed doors at its Vienna headquarters, the Organisation of Petroleum Ex­­porting Countries (Opec) opted to increase output. But by how much is still open to debate, deliberations and interpretation.

“We have an agreement for a nominal increase of 1 million barrels a day (bpd),” Saudi Energy Minister Khalid Al-Falih said after the meeting. But in reality, Nigeria’s Oil Minister Emmanuel Ibe Kachikwu felt, the accord will add about 700,000 bpd of oil to the market in the second half of the year as several members are unable to increase their output.

The much awaited, final communiqué also didn’t mention the figure cited by Al-Falih, and instead pledged that the group would focus on rolling back the deeper-than-intended cuts to the level, originally agreed upon in 2016.

Opec and its allies exceeded their pledged 1.8m bpd production cut by 47 per cent last month, according to Russian Energy Minister Alexander Novak. That’s about 850,000 barrels a day of additional supply losses that have been largely unintentional, reflecting the collapse in Venezuela’s oil industry and long-term declines in Mexican output.

“Opec member countries have exceeded the required level of conformity that had reached 152pc in May 2018,” Opec said in its communiqué. “Accordingly, the Conference hereby decided that countries will strive to adhere to the overall conformity level of Opec-12, down to 100pc” beginning July 1.

Press reports say the US government has also been quietly pushing Saudi Arabia and its Opec allies to increase oil production by about 1m bpd. This rare request from Washington came after US retail gasoline prices surged to their highest point in three years and President Donald Trump publicly complained about Opec policy and rising oil prices. Faced with mid-term elections, Trump could not have afforded higher prices at gas stations – and hence the pressure. The request followed Washington’s decision to withdraw from the Iran nuclear deal – at the prodding of Riyadh and its Gulf Arab allies. The US withdrawal from the deal could mean taking off about 1m bpd of Iranian crude, from the markets. Washington definitely wanted that deficit to be plugged by others.

For Riyadh to say no to the request and to antagonise Washington at this stage was not on cards. Indeed it was not the Clinton era, when in 2000, Bill Richardson, the then energy secretary during the second Clinton administration, phoned Ali Naimi, the then Saudi oil minister, in the middle of an Opec meeting, asking for a production increase.

The intervention turned counterproductive, enraging other members of the group, exacerbating the schism between Saudi Arabia and Iran and making the possibility of any reconciliation between the two still dimmer. Riyadh didn’t want that to happen this time. Hence it compromised, creating a win-win situation for both the groups within Opec.

By declining to announce a concrete figure and agreeing to start pumping more, to the extent, they are no longer overshooting the target set in November 2016, Opec somewhat confounded the markets. In the immediate aftermath, Brent jumped $2.29 a barrel, or 3.1 percent, to a high of $75.34 before slipping to around $74.60 by 1345 GMT Friday. US light crude was also $2 higher at $67.60.

That Opec finally managed a consensus is a success in itself when seen in the perspective of the clear split within the group on the issue of increasing output. Standing on one side were Saudi

Arabia, the UAE and its allies, while on the other side were Iran, Iraq and Venezuela.

In the end, the deal appeared to be more of a political compromise, especially when seen in the backdrop of the Iranian Oil Minister Bijan Namdar Zanganeh walking out of a meeting with fellow Opec ministers on Thursday evening, underlining nobody could persuade him to back an increase (in output).

Post-deal, analysts felt the actual increase is likely to total around two-thirds of Saudi Arabia’s target, with actual supply increases, more likely to fall in a range between 600,000 to 800,000 bpd.

A compromise was thus made, with Iran edging away from a threat to veto any agreement that would raise output, while Saudi Arabia agreeing to lower the addition to somewhere around 600,000 bpd. A win-win situation for both the camps with little effect on the overall crude balance.

How would Trump react to it is still to be seen.

Published in Dawn, June 24th, 2018