The OPEC+ group of oil producers have failed to reach a common consensus concerning the oil production increase for the August-December quarter as well as the extension of productions cuts to the end of 2022. Analysts predict that no conclusion will lead to a major surge in global oil price as demand surges post-pandemic.
The indecision regarding oil production and cut among the OPEC+ countries has pushed the oil price to a six-year high. On Monday, July 5, the group failed to reach a mutual consensus during the third round of talks in two weeks.
As a result, OPEC and its oil-producing allies have postponed the talks indefinitely. The group has now two camps – Saudi Arabia and UAE – failing to reach a consensus on production policy for August and beyond.
Changes in Oil Price
Today, on Tuesday, July 6, the Brent crude price has touched a six-year high. As of press time, Brent crude is trading at a price of $76.86 per barrel. At the same time, WTI Crude (West Texas Intermediate Crude) has advanced 1.20% to $76.08.
During the last Friday’s meet, the OPEC+ energy alliance reached a proposal to push oil production to 400,000 barrels per day between August and December 2021. Additionally, the members also proposed postponing the production cuts to the end of 2022.
While the UAE agreed to boost the oil production, it denied any extension of the output cuts. The UAE said that the baseline production set last year was itself very low. Thus, it won’t be easy for the region to sustain the existing production cuts in the latter half of 2022.
With the global economy is opening up post the COVID-19 pandemic, the demand for oil has increased considerably. Now if the production doesn’t increase with the requirement, it will shoot oil prices higher. Analysts at TD Securities told CNBC:
“With no increase in production, the forthcoming growth in demand should see global energy markets tighten up at an even faster pace than anticipated. This impasse will lead to a temporary and significantly larger-than-anticipated deficit. The summer breakout in oil prices is set to gather steam at a fast clip”.
The Future of Oil Alliance in Threat
The world’s two most powerful oil producers – Saudi Arabia and UAE – are at crossroads with each other. The bitter infighting between the two groups has led to questions about the future of the energy alliance.
The existing “no-agreement” scenario between the oil producers has left the global oil markets in limbo. While the global demand is increasing with the opening up of the markets, the talks to increase oil production have reached a state of no conclusion. In a research note accessed by CNBC, Helima Croft, head of global commodity strategy at RBC Capital Markets, said:
“OPEC+ has been thrown its most serious crisis since last year’s ill-fated price war between Saudi Arabia and Russia. Back-channel talks reportedly are continuing, but questions about UAE’s commitment to remaining in OPEC will likely grow in the coming days.”
Croft added that the UAE looks quite intended to step out of Saudi shadows to control the oil production.
“The Opec solidarity dissolved today. The pandemic held them together and now the post-pandemic is breaking them apart. The UAE is sticking to their guns on wanting their baseline raised. They want to be able to produce more,” said John Kilduff, a founding partner at Again Capital, in an email to CNBC.
Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.