What OPEC's Solidarity Means for Oil

Daniel Fowler
June 23, 2018

That has since then helped push up the price of oil by nearly 50 percent. Subsequently, the prospect of a full-blown trade war will likely dent risk on sentiment, which in turn will likely keep a lid on further gains for crude prices.

Oil producers' cartel, OPEC (Organization of the Petroleum Exporting Countries), and Russian Federation has made a decision to increase production by 1 million barrel per day (bpd) - or 1 per cent of global supply - striking a deal with Iran who were opposing the hike.

OPEC's official statement said members agreed to return to 100 percent compliance with the 2016 deal beginning on July 1. Russian Federation and other non-OPEC oil producers will now meet OPEC in a bid to secure their participation in the pact.

Top OPEC producer, Saudi Arabia faced the challenge of convincing a handful of reluctant producers including Iran, Iraq and Venezuela to support an output hike. After weeks of back-and-forth sparring, Saudi Arabia and Russian Federation have reportedly reached a preliminary deal to boost crude supply by 1 million barrels per day but other OPEC members including Iran have opposed this.

By avoiding setting individual country targets, the deal appears to give Saudi Arabia the leeway to produce more than its official OPEC target and fill the gap left by those like Venezuela who can not pump enough to meet their official allocation.

Trump slapped fresh sanctions on Tehran in May and market watchers expect Iran's output to drop by a third by the end of 2018.

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But Iranian Oil Minister Bijan Zanganeh said that was not the case: "Each country which has produced less (than its allocation) can produce more".

OPEC and partners including Russian Federation and Oman have since previous year cut output by 1.8 million bpd. The figure has been inflated by a plunge in supplies from almost bankrupt Venezuela.

Saudi Energy Minister Khalid Al-Falih told reporters in Vienna that an agreement had been reached for a "nominal" production increase of one million barrels per day (bpd).

"Both Saudi and Iran can show that they won", an OPEC delegate said.

Although higher prices are better for the oil industry, Wright says there must be a balance to prevent a dramatic spike in oil prices. Venezuela will raise its production when it can.

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