OPEC and non-OPEC ministers ended their meeting without a resolution after a key member departure from the OPEC+ coalition threw up uncertainties.
The group earlier postponed its meeting on oil output policy till Monday (5th July). The OPEC+ alliance had agreed in principle to boost supply from August 2021 from its current levels to meet expected rising demand in H2-2021. The current agreement OPEC+ agreement is scheduled to expire in April 2022.
Following reports of a potential supply glut in the market in 2022, some members had proposed extending the duration of cuts until the end of 2022 instead of Apr-2022. However, the UAE opposed these plans, putting the OPEC+ output agreement at risk. Oil prices were unperturbed by the news, rising slightly on Thursday before losing momentum on Friday.
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The Brent crude futures traded at $76.03 a barrel, up to 0.2% for the session, while U.S West Texas Intermediate (WTI) futures settled marginally to close lower at $75.16 a barrel. Oil prices hardly moved at the start of the week, as a cautious market awaits stalling talks between the major oil-producing nations on future production policy.
The planned Monday meeting of the Organization of the Petroleum Exporting Countries and its allies has however been postponed without a new date in sight.
The deadlock might be a blessing to Nigeria that is already backing an easing of output cuts by the producer group to push prices lower and more affordable for key consumers.
The group managing director of Nigerian National Petroleum Corporation (NNPC) Mele Kyari, had said that oil prices were “very high” and had started to constrain both producers and consumers.
In a recent interview with Kyari, he stated that “producers are aware that when your prices are too high, you lose your customers. You have to bring it to a level that your customers can afford.”
Oil prices have risen more than 50 percent in 2021, amid a recovery in demand buoyed by vaccine rollouts and OPEC+ supply discipline.
“The only way to pull down prices is to increase supply. So, that is what is going to happen. OPEC is going to intervene to see how we can bring down prices,” Kyari said.
Kyari said the rise in oil prices was hurting Nigeria, which relies heavily on fuel imports for its needs. Nigeria has four refineries with a combined nameplate capacity of 445,000 b/d, which are all offline after years of neglect, making the country fully reliant on refined product imports.
India, the world’s third-largest consumer of crude and a key customer of many OPEC producers, recently also renewed its call for the alliance to phase out its production cuts, saying the recent rise in oil prices was hurting its economy.
However, the oil production levels of the OPEC will remain unchanged for the time being, according to the delegates. The impasse between Saudi Arabia and the United Arab Emirate (UAE) has left an oil market thirsting for crude on tenterhooks since the talks began July 1, with many forecasters warning of a potential price spike if the 23-country alliance does not further unwind its production cuts.
The UAE is blocking a deal that would see the group raise production and extend the pact beyond April 2022, unless it gets a revision of its baseline for the production cuts. The UAE is not opposed to easing the cuts but wants its baseline to be revised up by around 700,000 barrels per day (bpd) from the current baseline level.
The UAE has a production capacity of some 4 million bpd; however, under the OPEC+ deal from last year, its actual output was capped at 2.59 million bpd until the end of 2020, rising to 2.74 million this year.
The coalition, currently withholding 5.8 million b/d of output, reconvened yesterday but could not reach a consensus. Yesterday, Brent Crude closed higher at $76.73 at 5pm local time while Nigeria’s Bonny Light was down by 0.6 percent to close at $74.16 a barrel.
Failure to reach a consensus — all OPEC+ decisions must be unanimous — would revert the alliance to its existing production agreement, under which output quotas would remain flat at July levels. That would squeeze an already tight market, as global economies continue to recover from the pandemic, boosting oil consumption.
The OPEC+ coalition was set to agree last week to boost collective crude output by 400,000 b/d each month from August to December and extend their supply management agreement through the end of 2022.
“Iraq supports the opinion to extend the OPEC+ production cuts agreement till December 2022 and the start of adding increments from August 2021, depending on the demand and needs of the oil market,” Ihsan Ismaael said in a ministry statement carried by state-run Iraqi News Agency.
Analysts still maintain a positive outlook, which is predicated on demand-led recovery in the second half of 2021. However, potential downside risks remain. The highly infectious delta variant of Covid-19, which is already sending some countries back into partial lockdown and triggering a worrying rise in cases in other nations, threatens demand recovery.
The standoff between the UAE and the rest of the cartel could ultimately mean tighter restrictions on compliant members, leading to a squeeze in an already tight market, further boosting prices. On the other hand, a disorderly OPEC+ could lead to cheating on the output quotas, leading to excess supply from OPEC+ and price weakness.
