OPEC+ has delayed its decision on the extent of crude oil production increases, raising questions about the alliance’s capacity to coordinate production and highlighting disagreements about supply policies.
Earlier this week, OPEC+ postponed for a third time its meeting to finalize the decision on the next phase of production increases and each country’s production quota.
Saudi Arabia, Russia and the UAE are reportedly struggling to reach a compromise. Oil prices have increased to the highest levels in three years due to a widening oil deficit, which we currently assess at slightly more than 1 million barrels per day (mmb/d). Oil supply is constrained by the previous alliance output decision, while crude oil demand is growing as the global economy recovers from pandemic-related shocks.
One week after OPEC and its allies abandoned their meeting in acrimony, the window for an August oil-production increase is closing without any deal in sight.
Regardless of the desire of other cartel members for a compromise, there’s little sign that Saudi Arabia and the United Arab Emirates have made progress in resolving a dispute over how their production cuts are measured, delegates said.
Read also: PIB: Nigerias oil marketers oppose discrimination in petrol importation
Meanwhile, both countries have proceeded to lock in supply volumes for their customers next month, leaving little scope for a change if there’s a sudden breakthrough, delegates said, asking not to be named because the information is private.
With August sales fixed and most Gulf countries preparing for an Islamic holiday that will close government offices and businesses for most or all of next week, a prompt supply increase may not be possible even if Russia, the U.S. or some other party manages to broker a deal. The timing of the holiday means the next gathering would be unlikely before the last days of July or perhaps early August.
The continuing stalemate leaves the oil market in limbo, unsure when or if it will receive additional shipments from the producers’ group. While prices have fallen about 3 percent to below $75 a barrel in London in the past week, there are still signs that demand exceeds supply.
Since the collapse in talks last week, there have been some efforts to bring the Organization of Petroleum Exporting Countries and its allies back to the negotiating table and revive the failed proposal for monthly output increases of 400,000 barrels a day.
The International Energy Agency on Tuesday warned that world oil markets are likely to remain volatile following a breakdown in talks between OPEC members and their non-OPEC allies, creating a no-win situation.
In its latest monthly oil market report, the IEA said energy market participants were closely monitoring the prospect of a deepening supply deficit if a deal was not reached by the Organization of the Petroleum Exporting Countries and its oil-producing allies, a group known as OPEC+.
“Oil markets are likely to remain volatile until there is clarity on OPEC+ production policy. And volatility does not help ensure orderly and secure energy transitions — nor is it in the interest of either producers or consumers,” the IEA said.
OPEC+ abandoned talks last week that would have boosted oil supply. Most delegates tentatively agreed to increase oil production by around 400,000 barrels per day in monthly installments from August until the remaining supply cuts were unwound. This was likely to extend supply cuts through to the end of 2022.
The UAE rejected these plans, however, insisting on a higher baseline from which cuts are calculated to better reflect its increased capacity. It means no agreement has been reached on a possible increase in crude production beyond the end of July, leaving oil markets in a state of limbo just as global fuel demand recovers from the ongoing coronavirus crisis.
OPEC+, which is dominated by Middle East crude producers, agreed to implement massive crude production cuts last year in an effort to support oil prices when the coronavirus pandemic coincided with a historic fuel demand shock.
The energy alliance has since met monthly to try to decide on the next phase of production policy.
OPEC+ has not made progress in resolving the dispute between OPEC kingpin Saudi Arabia and the UAE, Reuters reported on Tuesday, citing unnamed OPEC+ sources. It makes the prospect of another policy meeting this week less likely.
While Saudi Arabia, Russia and the UAE have offered to increase the alliance’s production by 0.4 mmb/d each month from August to December, the UAE also demands to increase its baseline production (a starting point from which its cuts and increases are calculated) from April 2022 to account for its larger production capacity following investment.
The country has a capacity of about 4 mmb/d and this may increase to 5 mmb/d by 2030, based on its investment plans. However, the country has an OPEC+ production quota of just over 2.7 mmb/d in July.
The gridlock tests the alliance’s ability and effectiveness to coordinate output decisions. In addition to the UAE, some other countries in the alliance, such as Iraq, Kuwait and Russia, are considering investments to increase production capacity.
Allowing one country to raise its baseline capacity may spur similar demands from other members and jeopardize efforts to control crude supply.
Although the price increases benefit crude oil producers, they are not driven by a structural deficit as about 6 mmb/d of production capacity has been removed from the market by OPEC+ and could easily be returned.
We ultimately expect OPEC+ to agree on production increases. In addition, Iran could add about 1.5 mmb/d of supplies if US sanctions are lifted. Given the recovery of the global economy and mobility, the increased supply should mostly be absorbed by higher demand leading to a continued rundown in inventories this year.
OPEC+ output policies have been the main driving force behind the oil price recovery in 2020-2021, after a sharp decline in demand in March 2020 and a short period of unilateral decisions on production volumes taken by key alliance members. Although oil demand has been recovering, emerging coronavirus variants are a risk to this recovery.
Oil prices
The IEA said it expects global oil demand to rise by 5.4 million barrels per day this year and by a further 3 million barrels in 2022, largely unchanged from last month’s forecast.
Meanwhile, the “remote” possibility of a market share battle between producers is hanging over energy markets, the IEA said, warning that higher fuel prices and rising inflation could damage a fragile economic recovery.
The uncertainty over the potential global impact of the highly transmissible Covid-19 delta variant was also likely to temper market sentiment in the coming months, the group said.
International benchmark Brent crude futures traded at $75.57 a barrel on Tuesday morning, up 0.5 percent for the session, while U.S. West Texas Intermediate futures stood at $74.51, around 0.6 percent higher.
Oil prices rallied more than 45 percent in the first half of the year, supported by the rollout of Covid vaccines, a gradual easing of lockdown measures and record production cuts from OPEC+.
“While prices at these levels could increase the pace of electrification of the transport sector and help accelerate energy transitions, they could also put a drag on the economic recovery, particularly in emerging and developing countries,” the IEA said.
These energy transitions refer to the necessary shift away from fossil fuel use to low-carbon alternatives in order to avert the worst effects of the climate emergency.
In a report published in May, the IEA outlined how the energy sector “holds the key” to the world’s climate challenge. It said that in order for the sector to fully decarbonize by 2050, a massive acceleration toward renewables, electric vehicles and energy-efficient building retrofits would need to coincide with a “huge decline” in the use of fossil fuels.
