OPEC had been planning to keep oil supply cuts in place until the end of 2018, but political pressure to increase output is mounting, leaving ministers with one question to ask at their meeting on June 22: By how much should OPEC increase? 

The US might have an answer for this question. Bloomberg News reported this week that the Trump administration may have quietly asked some OPEC members, including Saudi Arabia, to raise production by a million barrels a day.

This request followed the president’s tweet in April in which he blamed OPEC for artifically high oil prices.

According to various media reports, the Russians are also looking at increasing supply for the 24-producer alliance known as OPEC+ by a million barrels a day. 

There are different reasons that may lead Russians to ask for a supply rise. 

First, President Vladimir Putin expressed his displeasure with current oil prices. He told heads of international media, who met him in St. Petersburg on May 25, that oil prices over $60 were a bit high for consumers and that it was time for consultations with OPEC. 

Second, there are supply disruptions from many countries, and Putin has made his opposition to any politically inspired restriction on oil supply clear, as that will hurt the global economy.

“Time will show what happens in the future. Of course, a lot will depend on whether the Iran nuclear deal remains in place or not, and the way it affects the global energy market. We will see,” the Russian leader said.

Third, there are fears in Russia that the US and others may have a bigger slice of its market share. In his comments to heads of international media, Putin said that higher oil prices will empower “our competitors, including US shale oil producers, as they take some market share.” 

That fear is exaggerated. Although the US managed to increase its oil exports significantly this year, exporting 1.76 million barrels a day in April, according to US government estimates, the US may not be able to export significantly more because of the limited infrastructure to carry crude from production areas in the Permian and elsewhere to export terminals.

The main question now is whether raising output by a million barrels a day is enough to balance the market? Goldman Sachs thinks that this increase will not reverse the decline in oil stockpiles in the second half because it may take three to four months for OPEC’s supply hikes to hit the market.

Politicians look at short-term gains and not the big picture, which still shows that the world needs hundreds of billions in energy investments to meet rising future demand. 

Wael Mahdi

There seems to be a general agreement among many major players, including Russia, that the oil market is currently balanced.

So should OPEC increase production in June? Clearly, yes, but it shouldn’t be because of political pressure from consuming nations, but based on technical factors after looking at the supply-demand balance. It should be conducted in a manner that does not cause price shocks and kill investment, as happened in 2015 and 2016.

Politicians look at short-term gains and not the big picture, which still shows that the world needs hundreds of billions in energy investments to meet rising future demand. 

However, what worries many consuming nations is demonstrations over fuel prices, as they have reduced or eliminated fuel subsidies in the last three years when oil prices were lower.

If politicians keep pushing for lower oil prices today, that may translate into higher oil prices tomorrow, and by then no one will be able to do anything to increase supply, not even the mighty OPEC.

OPEC does not have enough spare capacity today to respond to any jump in demand, let alone next year or the year after. Due to sanctions on Iran and Venezuela and instability in Libya and Nigeria, it may be

hard to see any improvement in supply. If oil prices went down to Russia’s desired level of $60, the low investments in new projects in OPEC and non-OPEC countries would make the situation worse. 

Saudi Arabia has been advocating higher oil prices to encourage greater investment in the industry. The evidence does not support any level below $70. Last year the world discovered the lowest amount of oil since the 1940s, according to industry consultant Wood Mackenzie. Even US shale oil companies cannot increase output with Brent oil at $60. This means that it is better for nations to look at keeping the world’s market well-supplied, instead of making energy cheap for the time being.

High oil prices are not good and neither are low oil prices, but the market needs to determine the right price, not politicians.

  • Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi