The OPEC+ alliance of OPEC and non-OPEC oil producers has agreed to speed up the unwinding of oil production cuts, a decision that is a change in the timetable set nearly a year ago to restore all barrels withdrawn from the market at the start of the coronavirus pandemic. In absolute terms, the volumes in question are not big enough to make much impact on supply-side dynamics, but the decision is a deft diplomatic maneuver that has been welcomed by both Washington and Moscow.

Under the agreement reached at the June 2 ministerial conference of the 23-member alliance, producers will increase their collective production by 648,000 barrels per day in each of July and August rather than by 432,000 b/d per month to September. The decision accelerates the pace at which the barrels are being restored though it will not translate into a boost to supplies overall as it just advances already agreed upon increments. Further, several members within the alliance have already been unable to meet their higher quotas. But the move is significant in that it represents the first departure from the formula agreed to in July 2021 that Saudi Arabia and its allies have stuck to while ignoring a cacophony of calls from major consuming countries for producers to take action amid market turbulence caused by Russia’s invasion of Ukraine.

Oil prices initially responded positively to the news after a week of volatility that saw prices rise above $120 per barrel for benchmark Brent crude oil after the European Union agreed to impose a partial ban on Russian oil imports. They then fell after the OPEC+ agreement only to rise again as the ramifications of the supply agreement were examined more closely. Brent for August delivery traded briefly above $120/bbl at the open on June 6 then retreated slightly to trade just below the $120/bbl mark, a sign that the trading community does not consider the OPEC+ action as sufficient to balance supplies given low global inventory levels and the prospect of further disruption of Russian oil.

Oil prices have doubled since August 2021, when they were trading at levels closer to $60/bbl as global economic activity picked up after the havoc wreaked in 2020 by the coronavirus pandemic. The producers agreed in July 2021 to monthly increases of 400,000 b/d through May and thereafter by 432,000 b/d until September, when output restrictions are due to end. But supply has fallen far short of the collective target with the deficit widening to 2.7 mb/d in April from 1.3 mb/d in March as Russian output slumped, the International Energy Agency noted in its May Oil Market Report. Libya, which is exempt from the quotas, and Kazakhstan lost more than 400,000 b/d combined due to unplanned port closures. The loss was partially offset by the addition of 380,000 b/d from outside OPEC+, including the United States, the IEA noted.

OPEC made no mention of the Ukraine crisis or the decline in Russian production, which has added to global supply tightness. In announcing the outlines of the June 2 decision, the group’s Vienna secretariat said it was a response to the anticipated pickup in demand as coronavirus-induced lockdowns are eased (a reference to China) and to higher global refinery activity as the seasonal maintenance season comes to an end. Indeed, the press release following the ministerial meeting made clear that there was no policy change but only an adjustment to the schedule, so worded to avoid giving the impression that the producers had bowed to U.S. and Western pressure.

It said ministers reaffirmed the production adjustment plan and the monthly production adjustment mechanism approved in July 2021. At the same time, they agreed to “advance the planned overall production adjustment for the month of September and redistribute equally the 0.432 mb/d production increase over the months of July and August 2022.”

The quota allocations for July include Russia without taking into account the estimated 1 mb/d decline in Russian oil production as a result of international sanctions on its financial, business, banking, and energy sectors and self-sanctioning by international energy companies that have shunned Russian crude oil. However, more recent data shows that Russian production recovered in May with further increases expected in June despite the sanctions.

The United States and United Kingdom banned the importation of all Russian crude oil, refined products, and liquefied natural gas shortly after Russia’s February 24 invasion of Ukraine, while European countries, which rely heavily on Russia for their oil and gas supplies, grappled with the dilemma of how to shut out Russian energy imports without harming their economies. That changed on May 31, when EU leaders agreed to a gradual ban of seaborne imports of Russian crude oil by the end of the year while granting a temporary exemption for imports by pipeline to Hungary, Slovakia, and the Czech Republic, which are heavily exposed to Russia. The EU expects the ban along with additional pledges from some EU countries to cut Russian oil imports by 90% by the end of the year and is phasing out imports of Russian natural gas and LNG, which account for a much higher share of the European market than oil.

According to a May report by the Oxford Institute for Energy Studies, the EU imported 2.7 mb/d of Russian crude oil in March, of which 1.9 mb/d was transported by sea and the remainder by pipeline. The IEA estimates that Russia had to shut in 1 mb/d of crude oil production in April. This was because of reduced domestic demand; Russia still managed to increase exports that month. But Russian oil exports have held up and even rose in April as China and India snapped up discounted Russian crude. Russian seaborne crude oil exports surged in April to 3.77 mb/d from 3.26 mb/d in March, with purchases by India and China accounting for roughly half the total, according to calculations by MEES. India imported 1 mb/d in April from a 2021 average of 94,000 b/d, attracted by the discount offered by Russian oil companies. This pushed Saudi Arabia to third place after Iraq and Russia as the largest supplier of crude oil to Indian refiners, an indication of changes to trade flows as a consequence of the war in Ukraine.

The EU ban and the prospect of a further decline in Russian production during the second half of the year may have prompted OPEC+ to ramp up production faster than initially planned. OPEC+ ministers have been defending their earlier decision to adhere to the July 2021 schedule of increases saying markets were balanced and prices were rising because of geopolitical tensions and the lack of sufficient refining capacity. Riyadh also seemingly secured Moscow’s blessing during a June 1 visit to Riyadh by Russian Foreign Minister Sergei Lavrov, who was in the Saudi capital to attend a meeting of Gulf Cooperation Council foreign ministers. The outcome was a compromise that allows Russia to remain an active participant in the alliance while at the same time granting the United States a small concession on supply.

Saudi Arabia and Russia, as the two biggest producers in OPEC+, have been co-anchors of the alliance since it came together in early 2016, a relationship that has benefited both sides while also securing higher export revenue for their respective governments as well as the other producing countries. Lavrov and his Saudi counterpart, Prince Faisal bin Farhan, issued a statement reported by Russian media praising their cooperation in OPEC+ and its stabilizing effect on the market.

Russian Deputy Prime Minister Alexander Novak, who represents his country at OPEC+ ministerial conferences, said it was “the right decision, which will allow the market to balance.” Speaking on Russian television, Novak slammed the EU ban as political and warned that it would lead to “rising prices and shortages of refined products in Europe.” Russian oil production would recover in June and find other markets, he added.

It remains unclear just how much more Russian crude India and China could absorb as a result of the EU ban and whether further sanctions the EU and U.K. are considering, including a possible prohibition on insurance and reinsurance of tankers carrying Russian oil, will be implemented, thereby making it harder for Russia to divert cargoes to the Asian market.

Washington, which had stepped up diplomatic efforts with Saudi Arabia in recent months as President Joseph R. Biden Jr. had come under intense political and public pressure over rising inflation and near-record gasoline and diesel prices, welcomed the agreement. “We welcome the important decision from OPEC+ today to increase supply in July and August based on new market conditions,” White House Press Secretary Karine Jean-Pierre tweeted, crediting Saudi Arabia for its effort in securing the deal. “We recognize the role of Saudi Arabia as the chair of OPEC+ and its largest producer in achieving this consensus amongst the group members. We also recognize efforts and positive contributions of UAE, Kuwait, and Iraq.”

The change in tone might clear the way for a visit to Riyadh by Biden, which is widely expected though has not yet been officially confirmed by the White House. The U.S. president confirmed June 3 that he was considering a visit to Saudi Arabia but has reportedly delayed plans to travel to Israel and Saudi Arabia. Saudi Arabia’s modest policy change can be seen as an olive branch to mend relations with its main Western ally in efforts to reduce tensions that have emerged since Biden took office.

If there is no further action by the OPEC+ producers to curb supplies when they meet again at the end of June, it would theoretically mean that producers can pump at will as of September. The reality is that less than a handful have the capacity as a number of producers have fallen short of meeting their higher quotas. Saudi Arabia and the United Arab Emirates are heavyweights when it comes to spare production, having invested in boosting their upstream capacity. The small adjustment to crude supply is not expected to lead to lower gasoline prices, which might explain Biden’s reluctance to embark on what might prove a futile attempt to bring down gasoline prices in the United States while handing a diplomatic victory to Saudi Crown Prince Mohammed bin Salman, de facto leader of a country that Biden has labeled a “pariah” state over the murder of Saudi journalist Jamal Khashoggi.

But Saudi Arabia holds all the winning cards as the producer that controls the bulk of global spare oil production capacity and the key to global energy security. Under the June 2 OPEC+ agreement, Saudi Arabia’s quota will rise to 10.833 mb/d in July from 10.663 mb/d in June and the UAE’s to 3.127 mb/d from 3.075 mb/d. Saudi Arabia claims to have 12.5 mb/d of total production capacity, though the IEA estimates its maximum sustainable production capacity at 12.24 mb/d. It pegs the UAE’s maximum sustainable capacity at 4.12 mb/d, Iraq’s at 4.82 mb/d, and Kuwait’s at 2.79 mb/d. But Kuwait is pumping at close to its maximum capacity, while Iraq is hobbled by pipeline, export, and storage limitations that would likely cap its ability to pump much more than the current 4.4 mb/d. Based on April production levels, the IEA estimates that Saudi Arabia and the UAE together hold 2.9 mb/d of spare production capacity, defined as supply that can be brought online within one month and sustained for 90 days. This represents more than two-thirds of the total spare production capacity of 3.81 mb/d held by the 10 OPEC producers subject to quota restrictions. Libya, Iran, and Venezuela are exempt from OPEC quotas but have very little extra capacity, and only Iran could significantly boost production if it were free of sanctions (though the prospect of reaching a nuclear agreement with the United States has faded and makes an immediate boost unlikely). The IEA estimates Iran’s spare production capacity at 1.25 mb/d, Libya’s at a mere 30,000 b/d, and Venezuela’s at zero.

The burden would fall on Saudi Arabia and the UAE should Russian oil output sink to levels that may require both to step outside the confines of OPEC+ and meet any immediate supply shortfall or risk an unsustainable spike in oil prices that some experts have said could rise to $150/bbl. The risk in opening up the taps at full throttle is that spare production capacity would shrink and leave consumers exposed to unexpected geopolitical, accidental, or weather-related supply outages. As of August, the current restrictions end, though the producers have the option to extend supply management to the end of the year; the current agreement runs through December, which gives OPEC+ time to tweak supply further if needed. If there are no adjustments after August, those with excess capacity could, in theory, pump at will. But it is doubtful that Saudi Arabia would want to raise production unless there is specific demand for its crude. The kingdom, often referred to as the producer of last resort, has a stated policy of maintaining spare production capacity of 1.5 mb/d to 2 mb/d at all times and would likely be reluctant to exhaust its spare capacity at a time when energy security has become a priority concern for political leaders around the world. The UAE, which has the most diversified energy mix in the Gulf region, with its mix of solar energy and nuclear power, has invested heavily in raising its oil and gas production capacity in recent years, and it may want to take advantage of current market conditions to maximize revenue from oil exports in the short term before demand for fossil fuels falls off as the energy transition gathers pace.

The late U.S. Senator John McCain often described Russia as “a gas station masquerading as a country,” a reference to its dominance as a supplier of crude oil, natural gas, and coal. The problem is that the rest of the world is now paying the price at the pump, and, with oil and gas prices trading at near-record highs, Russian President Vladimir Putin’s war chest is also filling up.