Major oil producers decided Thursday to keep raising output levels in January, despite the Omicron coronavirus variant raising fresh questions over demand.
The OPEC+ alliance led by Saudi Arabia and Russia had so far resisted US-led pressure to significantly boost output to rein in surging energy prices.
Observers had expected the club to opt for a freeze in production for January, particularly after the emergence of the Omicron variant sent countries rushing to impose new travel curbs and mull other measures that could dampen demand and hurt oil prices.
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But after meeting for a little over an hour on Thursday afternoon via video conference, the 13 members of the Vienna-based Organization of Petroleum Exporting Countries (OPEC) and their 10 allies decided to stick with a modest increase in output of 400,000 barrels per day every month, as they have been doing since May.
The OPEC+ meeting came a week after the United States and to a lesser extent China, India and Japan decided to dip into their strategic reserves to help bring down crude prices, after a price surge that has undermined economic recovery.
“We suspect that the US-led co-ordinated release of oil reserves… was one reason why OPEC+ decided to push ahead with their plan to raise oil output,” said commodities economist Edward Gardner from Capital Economics, noting that “the group might not want to provoke further action from the large oil consumers”.
“Rather surprisingly, OPEC+ decided to go ahead with the increase, sending prices back into the red”, said Michael Hewson, chief market analyst at CMC Markets.
The decision did indeed send prices for the two benchmark oil contracts, WTI and Brent, tumbling to their lowest levels since late August at $62 and $65 per barrel respectively.
They then recovered to nearly $67 and $70, both gains on the day, but were still some way below the highs recorded in late October.
The United States welcomed the decision by OPEC+ members to increase output.
“Together with our recent coordinated release from the (strategic petroleum reserves), we believe this should help facilitate the global economic recovery,” said White House spokeswoman Jen Psaki.
Russian Deputy Prime Minister Alexander Novak told news agencies that the decision “was explained by the fact that the market is stable and that demand is recovering”.
However, he acknowledged that there was “a lot of uncertainty” linked to the Omicron variant and said that “we will — along with other countries — of course monitor the situation to see how it affects travel”.
Ann-Louise Hittle, head of oils research at Wood Mackenzie, said that “in a highly uncertain situation, the best option is to stick with the plan. That is exactly what OPEC+ has done today.”
Analysts also noted that Thursday’s meeting had been technically left “in session”, which according to Gardner “appears to be a way of leaving the door open for a change to output quotas before the next meeting in early January”.
In the run-up to the meeting, OPEC and its members had kept markets guessing as to the likely course of action.
At a technical meeting on Wednesday, OPEC Secretary General Mohammed Barkindo had “highlighted… that steady progress has been made on the global economic recovery”, but also “underscored the need to remain attentive to the prevailing uncertainties and shifting conditions, including those related to the new Covid-19 variant Omicron.”
The group’s spare capacity is some 10 times higher than the 400,000 barrels per day that it has been adding to the markets every month.
OPEC+ drastically slashed output last year as the pandemic began to unfold, and virus-related restrictions caused demand to crash.
Another variable the bloc may have to contend with in coming months is the possible return to the market of Iran if talks in Vienna lead to the revival of the 2015 nuclear deal between Tehran and world powers.
Iran’s Foreign Minister Hossein Amir-Abdollahian said Thursday a deal was “within reach if the West shows good will”.