Oil prices dropped nearly 1% on Monday (July 19) morning during Asia hours after members of the OPEC+ energy alliance agreed on Sunday (July 18) to end oil production cuts, ending a two-week spat between Saudi Arabia, and the oil-rich United Arab Emirates.
Brent crude futures were down 0.88% going for $72.94 per barrel, while U.S. crude futures lost 0.97% to sell for $71.11 per barrel.
The deal calls for the 23-member OPEC+ coalition to increase production by 400,000 barrels per day (bpd) on a monthly basis from August 2021 until all output cuts introduced at the beginning of the Covid-19 pandemic are phased out, as crude demand recovers.
In 2020, OPEC+ cut production by a record 10 million barrels per day (bpd), equivalent to about 10% of 2019 demand. The cartel has gradually reinstated some supply to leave it with a reduction of about 5.8 million bpd. It aims to fully phase out cuts by around September 2022.
Prices fell to historical lows last year with West Texas Intermediate crude falling below zero for the first time, before recovering to over $10 a barrel at one point. Brent, the international benchmark, fell to a nearly two-decade low of nearly $20 per barrel.
The move that reportedly removed the biggest hurdle to the final agreement was raising the baseline production levels, used for calculating output adjustments, for several members from May 2022, including Saudi Arabia, Russia, Kuwait, Iraq and the United Arab Emirates.
After the meeting, Saudi Arabia’s energy minister Prince Abdulaziz bin Salman said he believed the deal demonstrated the group could overcome disagreements and that the oil market would now have greater clarity, according to the Financial Times.
“We are here to stay,” he told a news conference, according to the New York Times. “What bonds us together is way beyond what you imagine.” He also said the agreement would be reviewed in full in December. Saudi Arabia, the world’s largest oil producer, is the de facto leader of OPEC.
Russian energy minister Alexander Novak told the Russia 24 network: “Today we made a decision for the market to restore production to a pre-crisis level.”
“OPEC countries always make decisions based on business, and they did it this time too” international oil and energy consultant, Manouchehr Takin, told Al Jazeera. “By May 2022, they will have revised the production costs and come to an agreement. Revisions are nothing unusual, but this time it seems to have been instigated by the UAE dispute,” Takin added.
“The deal marks a turning point for the oil industry, which went into a tailspin in the early months of the pandemic” the Wall Street Journal wrote on Sunday (July 18).
Oil prices have recovered strongly this year on returning demand, with Brent soaring 45% in the first half and forecasters expecting to see oil trading at $80 a barrel in the second half. Oil companies have returned to profitability, and shares have also risen sharply. But despite the easing of lockdowns, the demand outlook remains uncertain.
The Vienna-based group said it will meet again on September 1 to reassess market conditions and decide whether there should be any production level adjustments for October.