Unable to agree on a long-term production plan, OPEC and its partners will go month-to-month on setting output levels, aiming to release crude gradually onto the market without tipping it into a supply glut during an uncertain recovery from the coronavirus pandemic.
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The deal, announced Dec. 3, calls for the OPEC+ alliance to boost production by an initial 500,000 b/d in January, after which ministers will meet monthly to determine whether to tweak that for the month ahead.
Each monthly adjustment will not exceed 500,000 b/d in either direction, Russian energy minister Alexander Novak said, while Iranian oil minister Bijan Zanganeh told state media that the arrangement will remain in place until the total production rise reaches 2 million b/d.
The frequent meetings could add volatility to a still fragile oil market entering the doldrums of the northern hemisphere winter.
But they appear to be the best compromise among members, such as Saudi Arabia, that favored a straight rollover of deep output cuts through at least March, and others, including Russia, that had lobbied to increase quotas through the first quarter. The plan was brokered by Kuwait, Algeria and Azerbaijan.
"Surely the market understands that we don't want to be adventurous and issue [decisions] that will happen in three months when we're not sure," Saudi energy minister Prince Abdulaziz bin Salman told reporters after the decision was announced. "The market should take comfort with the idea that we have all of the tools in our kit and will release them drip by drip as we see how the market behaves. It's a sensible way of being very careful and diligent."
The alliance is aiming to implement a plan that can support the market through the traditionally low demand first quarter, with the hopes that a coronavirus vaccine can bring the global economy back on track sooner rather than later.
The producer group, which controls roughly half of global crude production capacity, is currently cutting 7.7 million b/d from November 2018 levels, and without a deal, the curbs were scheduled to ease by about a quarter to 5.8 million b/d from January.
Now the cuts will scale back to 7.2 million b/d and then be fine-tuned each month. No date has been set for the January meeting.
Novak said he would travel to Saudi Arabia to meet with Prince Abdulaziz in mid-December. The 500,000 b/d January rise will be split equally among all members, and Russia and Saudi Arabia will each be allowed to pump 126,000 b/d more, according to a breakdown of the new quotas seen by S&P Global Platts.
"Despite different negotiations and a lot of factors we have arrived at a very balanced decision which responds to challenges and allows us to make sure market remains stable and flexible to market challenges," Novak said.
PRESSURE ON QUOTA BUSTERS
Whether the decision heals a rift between OPEC kingpin Saudi Arabia and usual ally the UAE remains to be seen.
Formal talks between OPEC's 13 members on Nov. 30 had hit an impasse, prompting them to delay their scheduled meeting the next day with Russia and the eight other non-OPEC partners until Dec. 3.
The negotiations were so fraught that the alliance decided not to livestream ministers' opening remarks publicly, as is its usual practice.
The UAE had declined to endorse the Saudi-backed proposal to maintain the 7.7 million b/d cut for three months, sources said, while insisting that quota-busting countries, such as Russia, Iraq and Nigeria, be held to account with so-called "compensation cuts" that have to date been largely unenforced, except on itself.
Under the deal, the compensation mechanism will remain in place through March, compelling countries that previously violated quotas to make extra cuts of equal volumes going forward.
Prince Abdulaziz conceded that the compensation scheme "is not as successful as we are hoping."
But he pledged a "relentless quest" to ensure the cuts are seen through and that he has been given "many assurances" by member countries of their commitment. The January rise in quotas should provide some members more flexibility achieve their compensation cuts, he added.
Libya, Iran and Venezuela will continue to be exempt from quotas, and despite Libya's rapid output rise from a ceasefire, Prince Abdulaziz said the war-torn country would be allowed to keep producing until it reached a level of political stability.
TELLING THE OPEC+ STORY
As he has at previous meetings, the prince criticized the media for focusing too negatively on intra-OPEC+ disputes and questioning the coalition's dedication to the cause of balancing the market.
He asked journalists to stop imagining OPEC+ as a Game of Thrones melodrama and noted that overall compliance with their historic production cuts has stood at 99.5%.
The collective 1.6 billion barrels of production taken out of the market to combat the pandemic has likely exceeded most traders' expectations, he added.
Indeed, oil prices are back at their highest levels since March, and the market responded positively to the OPEC+ decision, sending front-month ICE Brent futures to $48.86/b as of 2000 GMT.
That is still far below all OPEC+ members' ideal levels, but Prince Abdulaziz said the alliance has delivered on what it needed to do.
"We're a group of responsible countries. At the end of the day people conduct themselves responsibly," he said. "I hope that you refrain from continuing your imaginative Star Wars or Game of Thrones. OPEC's Game of Thrones has finished."
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