OPEC+ Impasse: What That Means For Oil Prices, Production Going Forward
Ellen Wald, PhD | Jul 08, 2021 19:34
OPEC+ delivered a surprise to the oil market last week when it failed to reach an agreement to increase oil production at its monthly meeting. The market was expecting the group to agree to a proposal to raise production by 400,000 bpd in August and to continue to increase by that amount every month through the end of 2021.
The cartel was also looking to extend its current agreement on quotas beyond its April 2022 expiration date to the end of 2022.
And that's where the trouble started.
The United Arab Emirates, which agreed an increase for the summer was warranted, objected to extending the current quota system to the end of 2022 because the basis for that quota were numbers from October 2018.
The UAE felt that it was unfair to use it as a baseline through December 2022. The UAE oil minister argued that since the UAE had expanded its production capacity , requiring it to base its quotas on an outmoded baseline meant the UAE was cutting a larger share of its production than other countries. Therefore, it could not agree to extend the current production quota deal beyond the expiration date set at April 2022.
Saudi Arabia objected to any increase in output without also extending the deal. Saudi oil minister Abdulaziz bin Salman also took issue with the notion that the UAE wants to change its baseline production. He said in an interview :
“You cannot pick a month and say: this is my capacity, so you’ve got to give it to me.”
With Saudi Arabia and the UAE at an impasse, OPEC+ decided to postpone its July meeting indefinitely, meaning the 400,000 bpd production increase was also tabled.
h2 Prices Initially Jump/h2While the markets in the U.S. were closed on Monday in observance of the 4th of July holiday, both benchmarks moved up at the end of last week. Brent also rose 1.3% on Monday to a close of $77.20 per barrel.
The initial jump in prices can be explained by OPEC’s failure to meet the market’s expectation for a production increase in August. However, the rift between Saudi Arabia and UAE doesn’t mean that the market should expect oil prices to continue rising.
Right now, producers say they are committed to maintaining the production quotas currently in place, but the prospect of a larger rift between Saudi Arabia and the UAE remains.
h2 Spare Capacity Could Be Weaponized/h2
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Even though the oil market looks tight at the moment, the fact is that there is actually a great deal of spare capacity that could easily be weaponized.
Saudi Arabia, of course, wields the lion’s share of that spare capacity. It pumped 8.5 million bpd in May, willingness to unleash that productive capacity when oil negotiations go awry.
Even though there have been no threats to unleash oil production and drive prices down, the specter of this looms large over the market and is already fueling price volatility.
Although the market seemed caught by surprise at the sudden disagreement between Saudi Arabia and the UAE, who have traditionally been partners in the OPEC sphere, this rift had actually been brewing for some time.
In early December 2020, I wrote about the realignment taking place within OPEC and what the UAE’s growing independence and production capacity meant for oil markets.
At that time, I warned that “an empowered UAE is freer to make wise, long-term decisions within OPEC+ without as much concern for the price of oil tomorrow.”
This is what we are seeing play out now. The UAE is looking out for its own long-term interests and will continue to—even if it means rocking the boat on oil prices in the short-term.
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