In hopes of quelling rising oil demand, the group of international oil producers known as the Organization of the Petroleum Exporting Countries agreed on Sunday to boost oil production beginning next month, ending a weeks-long standoff that helped push oil prices to a nearly three-year high.
Following two weeks of fraught discussions, the oil cartel and its allies agreed to increase oil production by 400,000 barrels per day starting in August on a monthly basis until they are once again operating at pre-pandemic capacity.
After cutting production by about 10 million barrels per day last year, the oil producers are still supplying about 5.8 million fewer barrels per day than before the pandemic, meaning the Sunday agreement would put production back at pre-pandemic levels by September 2022; the group will reassess the decision in December.
In a statement, OPEC attributed the increase to the “ongoing strengthening of market fundamentals,” pointing to oil demand “showing clear signs of improvement” and falling oil inventories as the economy picks up steam around the world in light of accelerating vaccination programs.
The decision comes after producers from the United Arab Emirates stalled an agreement earlier this month because it also extended oil production limits through late 2022—something Saudi Arabian producers argued was necessary to prevent excess oil supply that could tank prices; Saudi Arabia agreed last week to increase those limits.
At roughly $72 per barrel Sunday, the price of a barrel of West Texas Intermediate has fallen nearly 5% since Saudi Arabia and the UAE reached their agreement, but they’re still at their highest point since October 2018.
Oil prices recouped all their pandemic losses by March, and they’ve surged roughly 20% higher since.
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OPEC will meet again on September 1 to assess market conditions and decide whether there should be any production level adjustments for October.
Despite the easing of lockdowns and an accelerating vaccine rollout, producers have been careful to ramp up supply after excess inventories drove prices down to negative territory for the first time in history last spring. An all-out price war erupted between oil-producing giants Russia and Saudi Arabia in March 2020—just as travel demand began to plummet during the coronavirus outbreak. Costly-to-maintain storage tanks soon filled up with no buyers, and the price of one American oil futures contract plunged below zero in April 2020. OPEC and its allies agreed to cut production in order to stabilize prices amid the turmoil, but according to the International Energy Agency, those inventories are still being worked off to this day.