OPEC has agreed to rollback overcompliance with the original production deal of November 2016. This appears to mean an increase of 450,000 b/d among the voluntary over-complying countries, with the bulk coming from Saudi Arabia, Kuwait, and the UAE. However, the communique could also be interpreted as enabling an increase of as much as 1 million b/d, with some members replacing lost volumes from involuntary over-complying countries like Venezuela. At this point, the small step interpretation is more likely. OPEC agrees to modest production increase for now As the dust settles from the negotiations in Vienna, it appears that OPEC has struck a delicate balance of setting an achievable production target for the remainder of 2018 while at the same time quelling the anxieties of oil importing nations, preventing the Saudi-Iranian relationship from deteriorating further, and maintaining a spirit of cooperation with Russia. The agreement endorses a gradual increase in production from those countries who can raise output, without specifying how much. OPEC will revisit the issue at its next meeting on December 3. According to the communique issued today, the compliance of the 12 OPEC countries participating in the production deal was 152 percent in May, and these countries “will strive to adhere to the overall conformity level of 100 percent” starting in July. Full compliance means a production cut of 1.2 million b/d from an October 2016 baseline. We estimate that OPEC collectively cut 2.2 million b/d in May, or 1 million b/d more than required, but this total includes Venezuela and Angola (neither of which can raise production) and Iran and Iraq (both of which were granted exemptions from the original deal). The eight remaining OPEC members collectively cut about 450,000 b/d more than required. Starting in July, then, the OPEC countries that can raise output will begin do so. Production should climb some 450,000 b/d above May 2018 levels over the next several months, with the bulk of it coming from Gulf states: we expect Saudi Arabia to add 130,000 b/d, Kuwait 160,000 b/d, and the UAE 70,000 b/d. At the same time, Venezuela and Angola’s production will continue to decline, to be only partially offset by rising production in Iraq. Iran’s oil minister has said Tehran aims to keep oil production flat in the near term. But can they offset Venezuela and Angola, too? The communique’s specific reference to the overcompliance of the OPEC-12, however, raises the possibility that the production increase could be much larger. If countries possessing spare capacity raise output to not only bring their own compliance down to 100 percent, but also make up for production shortfalls in Venezuela and Angola, the production increase could be as large as 1 million b/d. However, with a potential oil surplus on the horizon (see Global Oil Balance), we see this outcome as unlikely. Saudi Arabia will also be mindful of production increases in Russia, which should limit how much the Gulf states raise production. The absence of any non-OPEC countries from the terms of the communique suggests their output will be allowed to grow. We expect Russia’s production to rise about 130,000 b/d above May levels by the end of the year. This will satisfy the notalways-compatible interests of Russian oil producers and the Kremlin. Russian producers are eager to expand output, but the Kremlin is equally eager to maintain its collaboration with Saudi Arabia on energy and other issues as part of Russia’s broader geopolitical strategy. The OPEC communique seems to endorse both.