US leans harder on Opec+ to boost output: Update

Adds views from Opec+ delegates

US president Joe Biden's administration is urging Opec+ members to move faster to unwind the crude production cuts they made last year, citing concerns that unchecked fuel price increases will undermine the global economic recovery.

Opec+ "must do more to support the recovery" by accelerating the timeline for offsetting production declines it made last year when Covid-19 lockdowns peaked, White House national security adviser Jake Sullivan said today. The administration says it has been engaging with Opec+ members to stress that point.

"At a critical moment in the global recovery, this is simply not enough," Sullivan said.

Opec+ members last month agreed to increase their collective output target by 400,000 b/d each month until April next year, followed by monthly production increases of 432,000 b/d until last year's cuts are fully reversed, with the possibility to pause output rises for three months depending on market conditions. That timeline would have Opec+ fully unwind last year's cuts as soon as September 2022 or as late as December 2022.

The US administration has a more direct way of affecting Opec+ production levels, but that is tied to the outcome of stalled US-Iran nuclear talks. Lifting US sanctions against Tehran would boost global supply once Iran restores its production and export capacity.

US regular grade retail gasoline prices for the week ending on 9 August averaged $3.17/USG, the highest in nearly seven years, according to the US Energy Information Administration. A surge in travel demand this summer, the economic recovery and only modest increases in domestic crude production have put upward pressure on prices.

Biden's administration last month leaned on Opec+ members publicly for the first time to reach a deal on production increases, partly because of concerns about gasoline prices in the US. But the diplomatic push on Opec+ to boost output, at the same time as the administration constrains production on federal land, will give Republicans further ammunition to argue Biden's policies are unfair on domestic energy producers.

"Begging the Saudis to increase production while the White House ties one hand behind the backs of American energy companies is pathetic and embarrassing," US senator John Cornyn (R-Texas) said.

The effort also undercuts Biden's strategy of reducing US dependence on fossil fuels as a way to help address climate change.

The White House is separately leaning on other federal agencies to make sure the prices consumers pay at the pump are competitive. National Economic Council director Brian Deese today asked Federal Trade Commission (FTC) chair Lina Khan to use the agency's tools to monitor gasoline prices and investigate if there was any "illegal conduct" that might be causing the rise.

"The FTC could examine the asymmetrical phenomenon in oil and gas markets in which [gasoline] prices tend to rise more quickly to adjust to spikes in oil prices than they fall when the price of oil declines," Deese wrote.

The letter was also sent to the US Commodity Futures Trading Commission (CFTC), the US Federal Energy Regulatory Commission and the US Justice Department. The CFTC has yet to release a comprehensive study offering a full analysis of the crash in the Nymex front-month WTI crude price on 20 April 2020 when it settled at negative $37.63/bl, and instead has only completed an interim report.

Make your rival an ally

Since the Opec+ coalition was formed in 2016, the US has played the part of both a political ally to some of the group's members and a production rival, whose shale output becomes increasingly more cost-effective as production cuts prop up global oil prices. But economic considerations have trumped diplomatic entreaties in determining Opec+ policy.

The group sets its sights on market stability, factoring in global inventories, producer and buyer interests, and the extent to which price levels affect oil sector investment and the long-term supply outlook. Two Opec+ delegates flagged that the market, as it stands, is unlikely to be able to accommodate a more accelerated pace of output growth than currently planned, with one of them adding that the spread of the Covid-19 Delta variant has contributed to market uncertainty. A third delegate noted that Opec+ is already set to deliver a substantial increase in production, as the rising quotas come on the back of Saudi Arabia ending its extra 1mn b/d cut last month.

However, there are some lingering questions over the ability of some Opec+ member countries to meet their higher production targets. In west Africa, a lack of investment and natural decline at mature fields drove Angola's July output to the lowest since early 2005. Some Opec+ countries — notably Saudi Arabia, Kuwait, Iraq and the UAE — are working on growing their crude capacity, which could in theory compensate shortfalls elsewhere, although the coalition insists that individual deal participants comply with their quotas.

By Chris Knight and Ruxandra Iordache