OPEC and its alliance (OPEC+) canceled the Monday (July 5) meeting to discuss plans to lift production curbs after failing to reach an agreement. A new meeting date has not yet been determined.
The group on July 1 voted on a proposal that would have returned 400,000 b/d to the market each month from August through December, resulting in an additional 2 million b/d by the end of the year. Also, the organization’s production cut agreement was proposed to be extended from April 2022 to December 2022. However, the preliminary agreement was blocked by the United Arab Emirates (UAE). OPEC+ met again on Friday (July 2) but failed to reach a deal (OGJ Online, July 2, 2021).
The UAE has invested heavily in recent years to increase production. The country has publicly argued that the baseline for calculating its share of production reductions is too low. The UAE is the third largest producer of OPEC in 2020.
“The current deal was not fair,” said UAE Energy Minister Suhail Al Mazrouei over the weekend. He argued that the country was forced to idle a third of its output, while other countries were allowed to increase production relative to their maximum outputs.
With no new agreement reached, uncertainty rises. Continued compliance could result in flat production in the coming months. However, Martijn Rats, an oil strategist at Morgan Stanley, expects production will still follow the '+2 million b/d to December' path and that the framework extension will be managed in the coming months.
Martijn estimates the oil market has been undersupplied by around 2 million b/d in recent months and that demand growth of 3 million b/d still lies ahead between June and December. The balance looks particularly tight for the third quarter and without more OPEC production, inventories are set to draw further, supporting prices.
“Looking at the current deadlock, it is unlikely that the UAE alone will be allowed to get a higher quota, because this will come at the expense of other members, in particular Saudi Arabia. Another very real consideration is that many of the OPEC+ countries, Russia in particular, are facing natural decline in the medium-term, so a lower quota in some cases could be strategic for long-term revenues,” said Louise Dickson, an oil markets analyst at Rystad Energy.
On Tuesday, US oil benchmark West Texas Intermediate (WTI) crude futures traded as high as $76.98/bbl, a price not seen since November 2014. The gains were soon erased, and the contract for August delivery fell below $75/bbl. Similarly, Brent crude hit its highest level since late 2018 before also reversing gains, last trading around $75.30/bbl.
