Nairametrics reported on Monday that the Organisation of the Petroleum Exporting Countries and allies (OPEC+), who were supposed to meet on Monday to conclude on their decision as to whether or not to extend output cuts, did not do so and the group left the world guessing as no announcement was made to reschedule the meeting for a new date, indicating that the clash on Friday between Saudi Arabia and the United Arab Emirates (UAE) is yet to be resolved.

There is also a concern for OPEC+ players that non-member, the United States, could boost output and grab market share as current price levels make shale oil production profitable. The standoff between OPEC+ members has significant implications for the price of oil and the global economy. Since the members have failed to reach an agreement, this means that the group could keep its existing cuts of 5.8 million bpd in place until April 2022, when the deal expires. The oil market has reacted with significant volatility since Monday’s call off.

The implication of this, since the output will remain unchanged in August, is that oil prices will be bullish in the short term. However, a breakdown in talks puts the broader deal at risk, increasing the chances of greater supply in the long run as OPEC+ members will be looking to gain market share which will not do well for the price of oil. If the members were to reach an agreement, the following could be the likely outcomes:

Increase and Extension (Saudi Arabia-win situation)

This is a win situation for Saudi Arabia, the top producer in the OPEC+. The country is among those keen to see output raised in stages by a total of 2 million barrels per day (bpd) between August and December and then an extension of remaining cuts until the end of 2022 from current plans to cut until next April.

The UAE has frowned at the extension because the country is upset about the baseline from which its production cuts are being calculated. 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. If this proposal is adopted, oil prices could be set for further gains, especially for oil contracts further along the futures curve.

Increase Only (UAE-win situation)

Although not happy with it, the UAE has said it will support raising production by 2 million bpd until the end of 2021 but did not entertain discussions on extending the pact beyond April 2022, a position that has caused the standoff between the nations. This proposal, if adopted, could also see oil prices rally further in the short term, especially as analysts have said that the proposed increase will keep the oil market in deficit given rising demand.

Read more at: https://nairametrics.com/2021/07/07/what-opec-standoff-could-mean-for-oil-prices/

Author avatar