July 28, 2021

The oil market, in limbo as OPEC + struggles to reach a production pact

Published:

5 Jul 2021 11:04 GMT

If the energy alliance fails to reach an agreement to increase production, crude prices could skyrocket, putting the global economic recovery from the covid-19 pandemic at risk.

Oil prices are swinging above $ 75 a barrel after the OPEC + alliance failed to agree on production policy last week amid mounting tensions between Saudi Arabia and the United Arab Emirates (UAE) .

What is the problem?

OPEC and its non-member allies led by Russia are discussing a gradual increase in oil production in the coming months. Most producers advocate extending a broader agreement until the end of 2022 in the interest of stability. However, this extension of the supply pact is being blocked by United Arab Emirates, which “unconditionally” supports an increase in production, but has objections on the basic elements of the agreement.

“The problem is to put a condition on that increase, which is the extension of the agreement,” the Emirati Minister of Energy and Infrastructure, Suhail al Mazrouei, explained to CNBC on Sunday, emphasizing that the current OPEC + proposal is not “a good business “for your country.

In particular, the UAE is demanding a review of the so-called baseline – the figure from which production cuts or increases are calculated for OPEC + countries – before extending the supply deal, Reuters details. The higher that baseline, the more oil a country can produce. The current baseline for the UAE dates back to 2018, and the country wants to raise it if the deal runs through 2022.

Meanwhile, Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, on Sunday called for “compromise and rationality” to secure the deal when talks resume. The prince assured the Al Arabiya channel that the extension of the OPEC + agreement is “the basis and not a secondary issue”, and warned that “if everyone wants to increase production, then there must be an extension.”

“Great efforts have been made in the last 14 months that have provided fantastic results and it would be a shame not to maintain those achievements,” he said.

What are the risks?

The energy alliance will meet again this Monday after meeting failures last week. If you cannot reach an agreement to increase production, oil prices could skyrocket, putting the global economic recovery from the covid-19 pandemic at risk.

In addition, some analysts consulted by CNBC do not rule out a price war if the negotiations derail.

“If the talks end in total discord, there is a risk of a return to an ‘each for himself’ production scenario, which could cause a reversal of this year’s oil price rally,” estimates Helima Croft, chief executive officer. of Global Commodity Strategy at RBC Capital Markets. The expert says that while they don’t see this as the likely outcome, they can’t “rule it out completely” either.

Along the same lines, Alejandro Barbajosa, vice president of crude for the Middle East and Asia Pacific at Argus Media, points out that, “in the very short term”, a lack of agreement would mean that “all production is weak and everyone is approaching a price war “. However, he added that he does not believe that “OPEC comes close to that.”

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