OPEC+ agreed on Sunday exactly how the group should proceed with its oil supply management in the coming months, putting an end to a two-week stalemate over baseline production levels. The group hopes that this new united front will reassure the markets that there is no oil price war looming. The ministers of the OPEC+ alliance held a virtual meeting on Sunday, two weeks after it had failed to clinch a deal due to the objections of the United Arab Emirates (UAE) - OPEC’s third-largest producer behind Saudi Arabia and Iraq - which had insisted that its baseline production levels be raised.
Through mediation and talks over the past two weeks, OPEC+ managed to overcome the impasse and reached a compromise agreement that was endorsed by the ministers at Sunday’s meeting.
The New Production Level
The group agreed to extend the existing deal from April 2020 through the end of December 2022. OPEC+ will add another 400,000 barrels per day (bpd) on a monthly basis beginning in August 2021 and until it phases out all the 5.8 million bpd that the group is currently keeping off the market, in light of improving global oil demand.
“The Meeting noted the ongoing strengthening of market fundamentals, with oil demand showing clear signs of improvement and OECD stocks falling, as the economic recovery continued in most parts of the world with the help of accelerating vaccination programmes,” OPEC said in a statement.
The bone of contention from the past weeks - reference production levels, or baselines - was also resolved with a compromise. Effective May 1, 2022, the UAE will have a higher reference level, but so will Saudi Arabia, Russia, Iraq, and Kuwait.
- The UAE will see its baseline lifted to 3.5 million bpd as of next May, from 3.168 million bpd now.
- Kuwait’s reference level will be raised to 2.959 million bpd from 2.809 million bpd, and
- Iraq will see its baseline increased to 4.803 million bpd from 4.653 million bpd.
- Saudi Arabia and Russia will each have a reference level of 11.5 million bpd from May 2022, up from 11 million bpd.
Those five countries combined will have 1.63 million bpd higher reference levels from May next year, including 1 million bpd for the two leaders of the OPEC+ pact, Saudi Arabia and Russia.
Baseline Isn’t Production
This, however, doesn’t mean that those members will pump that much more, but the higher baselines indicate that OPEC+ is seeking higher production capacity, which will allow it to continue to be the manager of the oil market in the coming years.
Nigeria and Algeria had also asked for a revision of their respective baseline production levels, but their levels were not adjusted. Their requests could be reviewed at a later stage.
Sunday’s deal removes the uncertainty that has been hanging over the oil market since the beginning of July. Market observers feared that if OPEC+ failed to reach a consensus on future policies, another oil price war might break out.
The deal “ended a fortnight of uncertainty and the tail risk of an implosion in the producers’ alliance,” Vanda Insights said in a Monday note.
The energy ministers of Saudi Arabia and the UAE spoke at a press conference on Sunday and reiterated their commitment to dialogue.
“We appreciate the constructive dialogue we had with his highness and OPEC,” UAE’s Energy Minister Suhail Al Mazroui said, referring to the Saudi Energy Minister, Prince Abdulaziz bin Salman.
“I confirm that the UAE is committed to this group and will always work with it and within this group to do our best to achieve the market balance and help everyone. The UAE will remain a committed member in the OPEC alliance,” Al Mazroui said at the OPEC presser after the meeting.
“Consensus building is an art,” Abdulaziz bin Salman said, declining to say how the consensus was built.
Bullish Sentiment, Oil Prices Crash
Even though oil prices crashed on Monday, the agreement is seen as positive for the oil market, with OPEC+ guaranteeing a small supply increase of 400,000 bpd each month and agreeing to meet each month to review fundamentals.
Earlier on Monday, analysts and forecasters felt that the deal had prevented the oil price crash that would have been a certainty had the talks had ended with an oil price war in the style of the March 2020 price wars between Saudi Arabia and Russia.
The monthly incremental increases in supply are also expected to prevent oil prices from jumping too much, which could destroy some oil demand and accelerate inflation.
OPEC+ is Here to Stay
“This is a sign that Opec+ is keen to continue managing the market and drawing down inventory,” Amrita Sen with Energy Aspects told the Financial Times.
“OPEC plus is here to stay” Prince Abdulaziz bin Salman said at the meeting.
Despite the apparently bullish news, oil prices had crashed nearly 6% by 11 am CT on Monday morning.
By Tsvetana Paraskova for Oilprice.com
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