Oil prices tumbled after OPEC+ agreed Sunday to gradually end the remainder of production curbs that began last year.
After a special meeting Sunday, the oil group announced that its collective production will rise by 400,000 barrels per day starting in August, and continue expanding at that monthly pace through September 2022.
The agreement looks to continue managing supplies vs. booming demand, which has lifted oil prices more than 40% this year as the economy rebounds sharply.
In April 2020, OPEC and key allies like Russia agreed to slash production by 9.7 million bpd when oil prices collapsed as the Covid-19 pandemic raged. They have since incrementally loosened those curbs to about 5.8 million bpd.
Sunday’s deal also allows the United Arab Emirates, Saudi Arabia, Iraq, Kuwait, and Russia to recalculate their production quotas, allowing them to pump more oil.
Without a deal, oil prices would have seen more upward pressure. In late June, OPEC estimated that if output stays the same, the supply provided by the oil group will fall short of expected demand by 1.5 million bpd in August and 2.2 million bpd in Q4.
But OPEC+ will also rely on U.S. shale companies to remain restrained with their own production and not expand drilling quickly to take advantage of higher oil prices.
“The announcement of these higher baselines, right ahead of U.S. earnings, may contribute to shale producers staying disciplined, the second bullish supply catalyst we expect in coming weeks,” Goldman Sachs analysts wrote in a note Monday.
U.S. crude futures dived 3.7% to $69.13 a barrel Monday. Brent oil prices fell 3.4% to $71.11.
Exxon Mobil (XOM) shares fell 2.6% on the stock market Monday and Chevron (CVX) dropped 2.3%. Among top shale stocks, Diamondback Energy (FANG) lost 2.9%, EOG Resources (EOG) fell 2.2% and Continental Resources (CLR) slumped 2%.
Phil Flynn of the Price Futures group wrote in his morning note that the OPEC+ agreement isn’t why oil prices are down.
“The unity within the OPEC+ cartel is very bullish for prices and the amount of barrels that they’re adding to the global market is very small and just enough to get by.”
The OPEC+ agreement also aims to defuse renewed tension that threatened to throw oil prices into chaos.
Earlier this month, a dispute with the UAE over its production baseline saw multiple OPEC+ meetings end with no resolution.
The standoff jeopardized a tentative agreement to gradually add 2 million barrels a day to OPEC+’s output via monthly boosts of 400,000 bpd between August and December. The plan also called for extending their overall agreement to curb supply to December 2022 from April 2022.
Saudi Arabia, OPEC’s de facto leader, and the UAE reached an agreement last Wednesday that would allow the holdout member to boost production.
But later Wednesday, sources told Energy Intelligence that Iraq would also seek an upward revision to its own production baseline.
Such follow-on demands were what Saudi Arabia wanted to avoid in initially denying the UAE its request for a new baseline.
But the higher baselines for the five producers agreed upon Sunday could help avoid pushing OPEC+ to the brink again.
Follow Gillian Rich on Twitter for energy news and more.
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