Oil price set for further rise as OPEC meeting ends in stalemate

Ministers of the Organisation of Petroleum Exporting Countries (OPEC) and its allies, OPEC+ yesterday called off oil output talks after a deadlock that spanned three days of consultations as progress on contentious areas remains stunted.

Reuters reported that the disagreement followed from last week when the United Arab Emirates (UAE) balked at a proposed eight-month extension of output curbs, meaning no deal to boost production has been agreed.

The failure to agree means an expected increase in oil output from August will not take place, helping to drive up international benchmark Brent crude, which was trading around 1 per cent higher at over $77 a barrel.

Oil prices are now at the highest since 2018 and have already prompted concerns that inflation could derail a global recovery from the pandemic.

Last week, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, stated that Nigeria would support an increase in the production quotas allocated to the participating countries.

He said this could return the market to a bearish position, adding that beyond $50 to $60, rising oil prices was not in the interest of resource-dependent countries like Nigeria.

OPEC+ agreed to record output cuts of almost 10 million barrels per day (bpd) last year, about 10 per cent of world output, as the pandemic hit, but has been gradually relaxing the quota which now stands at about 5.8 million bpd.

The UAE had accepted a proposal from Saudi Arabia and other OPEC+ members to raise output in stages by about two million bpd from August to December but rejected extending remaining cuts to the end of 2022 from the current end date of April.

The country is upset about the baseline from which its production cuts are being calculated and wants it raised. Abu Dhabi has invested billions of dollars to increase its production capacity and says its baseline was set too low when OPEC+ originally forged their pact.

On Monday, OPEC+ sources said the UAE’s position was unchanged, stressing that a ministerial panel chaired by Saudi Arabia and Russia, the Joint Ministerial Monitoring Committee, needed more time to discuss the issue.

The UAE has said it was not alone in seeking a higher baseline as others, including Azerbaijan, Kazakhstan, Kuwait and Nigeria, which Reuters reported had requested and received new ones since the deal was first agreed last year, are also making the same demand.

Decisions in OPEC+, which groups the cartel with Russia and other big producers, must be unanimous, according to the rules.
Potential outcomes, OPEC+ sources said, include raising output from August, or raising output from August and extending the remaining cuts with a new higher baseline figure for the UAE.

OPEC+ could also go ahead with the deal as it is until April 2022 and discuss a new UAE baseline as part of a new deal, the sources said. The dispute reflects a growing divergence between Saudi Arabia and the UAE.

Before the stalemate, expectations were rife that the oil producers’ group could agree on returning about 400,000 barrels of oil per day between now and December.

The disagreements within OPEC+, that have been dragging policy negotiations since Thursday, have added a serious spin of uncertainty for traders and prices are rising on the prospect of a no-deal that could strip the market of the extra barrels that it expects from the alliance from August.

Oil market tensions have not been this tense since the March 6, 2020 breakup, and the uncertainty is driving prices beyond two-year highs in the near short term.

The reason a no-deal is bullish for the market is that unlike the previous breakup in March 2020, if OPEC+ members don’t agree on a new deal — they are still party to the original deal already in place, which does not immediately cater for more output after July.

As balances stand at the moment and with a surge in summer oil demand, even rising output by as much as 500,000 bpd in August is bullish and it is believed that keeping OPEC+ production steady to July levels instead is ultra-bullish due to the undersupply that such a development would cause this season.

The core of the OPEC+ rift is that the UAE is lobbying for more production, a demand Russia is said to be quietly supporting on the sidelines and Saudi Arabia loudly opposing in the public arena.

If the UAE were to get leniency on its production quotas, it is likely other supply-enthusiastic countries such as Russia and Iraq would also be able to negotiate supply increases.