OPEC+ Deal

In News

Recently, the Organisation of Petroleum Exporting Countries (OPEC) and its allies led by Russia (OPEC+) have agreed to gradually withdraw Covid-19 related production cuts by September 2022.

Background

• In April 2020, the OPEC+ group of countries entered into a two-year agreement, which entailed steep cuts in crude production to deal with a sharp fall in the price of oil as a result of the Covid-19 pandemic.
  • The price of Brent crude hit an 18-year low of under USD 20 per barrel in April 2020 as economic activity around the world crashed as countries dealt with the pandemic.
  • The initial production cut by OPEC+ was about 10 million barrels per day or about 22 percent of the reference production of OPEC+ nations.
• However, in November 2020, the price of Brent crude started climbing consistently and had risen to USD 76.5 per barrel (July beginning 2021) up from about USD 40 per barrel at the end of October 2020, after the steady rollout of vaccination programmes around the world. 
• Still, OPEC+ maintained lower levels of production despite crude oil prices reaching pre-Covid levels, with Saudi Arabia, notably, announcing a further cut in production of 1 million barrels per day for the February-to-April period, which helped boost rising prices even further.
• Reactions
  • Due to this, the OPEC+ has been criticised by developing economies, including India, for deliberately maintaining low supply levels to raise prices.
  • India held that the high price was slowing down the economic recovery of developing economies post the pandemic.
• In April 2021, OPEC+ agreed to gradually increase crude production as prices reached USD 64.5 per barrel including a phased end to Saudi Arabia’s 1 million barrel per day cut in production by July.
• In the beginning of July 2021, the round of meetings among the group stalled because the United Arab Emirates (UAE) had pushed back proposals making an increase in crude oil supply conditional on an extension to an output agreement.
  • Another round of discussions between OPEC+ countries were also called off because key players failed to make any progress in resolving key issues.

Standoff between UAE and Other OPEC Countries

• The initial proposal by OPEC+ countries had tied the gradual increase in production to a six-month extension of the production agreement which was set to expire in April 2022.
• Although the UAE agreed upon the need to increase crude oil production from August, it did not agree to the proposal by the OPEC Joint Ministerial Monitoring Committee (JMMC).
• The UAE’s key objection to the existing agreement is the reference output used to calculate the total production apportioned to each oil-exporting country.
  • It noted that the baseline production level reference used in the current agreement was not reflective of the UAE’s production capacity and, therefore, led to the UAE being apportioned a lower share of total production of crude oil.
  • It held the baseline reference production levels as unfair and it would only agree if the baseline production levels were reviewed to be fair to all parties.

Major Highlights of Current Decision

• This announcement has led to crude oil prices falling to about USD 72 per barrel.
• OPEC+ has decided to increase overall production by 4,00,000 barrels per day every month till the remaining portion of the group’s 10 million barrel per day production cut, announced in April 2020, is completely phased out.
• The decision ends the standoff between the UAE and other OPEC+ countries.
• The final decision includes an extension of the production agreement to September 2022 and also provides for increases in reference production levels for Saudi Arabia, Russia, UAE, Kuwait and Iraq.

Impact on India

• The announcement of an increase in production levels coupled with fears of increased mobility restrictions following an increase in Covid-19 cases has led to a pause in the relentless rise of crude oil prices.
  • The price of Brent crude had risen to over USD 77 per barrel earlier in July over a potential deadlock in OPEC+ negotiations on production levels.
• India has already seen a 21.7 per cent increase in the price of petrol and diesel since the beginning of the year.
  • Petrol is currently retailing at Rs. 101.8 per litre in the national capital and diesel is retailing at Rs. 89.87 per litre.
• India is the world’s third-biggest oil importer and consumer stated that the delay in decision can threaten the consumption-led-recovery in some countries.
  • India imports about 84 per cent of its overall crude needs with over 60 per cent of that coming from Middle Eastern countries, which are typically cheaper than those from the West.
• Rising oil prices are posing fiscal challenges for India, where heavily-taxed retail fuel prices have touched record highs in some parts of the country, threatening the demand-driven recovery.
• India is currently facing record-high prices of petrol and diesel, with pump prices of the former exceeding Rs. 100 per litre in 13 states and Union Territories(UTs).
  • High crude prices have led to Indian oil marketing companies hiking the price of petrol by about 19.3 per cent and that of diesel by about 21 per cent since the beginning of 2021.
• Steps Taken
  • India has asked state refiners to speed up the diversification of oil imports to gradually cut their dependence on the Middle East after the OPEC+ decision.
  • India, hit hard by the soaring oil prices, has urged producers to ease output cuts and help the global economic recovery. 
  • One plan is to import oil from a new producer, Guyana.
  • The country’s top refiner Indian Oil Corporation (IOC) has also renewed its oil import contract with Russia.
  • India is also hoping to resume Iranian oil imports.

Source: IE