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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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OPEC Stalemate Could Spark A New Oil Price War

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Nearly a week of formal and side talks and behind-the-scenes negotiations failed to resolve a dispute over baseline production levels at OPEC+. The discord threw the group in its most serious crisis since March 2020, when the alliance’s leaders Saudi Arabia and Russia disagreed on oil supply management with global demand crumbling in the pandemic.  

Now the dispute is between two Arab Gulf allies in OPEC—the United Arab Emirates and Saudi Arabia—in what analysts see as the UAE looking to step out of the Saudi shadow in global political affairs. 

The UAE is digging in its heels, making its approval of OPEC+ adding more supply to the market contingent on the group acknowledging that the UAE’s baseline for the cuts was too low and “unfair.”

The disagreement, which OPEC+ has been unable to overcome for five consecutive days, is bringing back the specter of last year’s oil price war when the alliance abandoned all deals for a month. Traders and analysts have already started to ask themselves: is this the dispute that will dissolve the production pact again? And will OPEC+ let its firm grip on oil market management slip, after being in such a favorable position this year with U.S. shale keeping production flat and not unraveling the alliance’s efforts to keep markets tight?  

Third Time’s Not a Charm

Despite mediation, consultations, and side talks in the weekend – after two days of ‘no deal’ outcome of meetings – OPEC+ failed a third time on Monday, called off the OPEC+ meeting, and said it hadn’t decided yet when the next meeting would be held.  

The lack of agreement overproduction for next month likely means that OPEC+ will keep, for now, their production in August flat compared with July. This immediately sent oil prices jumping to the highest in three years, considering that global oil demand is bouncing back and the market was initially expecting at least a 500,000-bpd increase from the alliance in August. 

“The market began factoring in the prospect of no additional supply hike from the OPEC/non-OPEC alliance in August,” Vanda Insights said in a daily note on Tuesday.

$90 Oil?  No additional supply at a time when inventories are drawing down and demand is roaring back will likely send oil prices higher in the near term, at least until the group reaches some sort of a deal. 

Oil at $85 to $90 a barrel is on the cards if OPEC+ doesn’t raise supply next month, Fereidun Fesharaki, chairman of industry consultant FGE, told Bloomberg TV in an interview. Fesharaki expects the group to reach some sort of compromise over the next one to three weeks, during which oil prices will continue to rise. 

“No additional oil in August, at a time when the physical market is incredibly tight, can easily lead to prices overshooting above US$90 a barrel,” Amrita Sen, Director of Research at Energy Aspects, told Bloomberg.  

New Price War? 

The UAE-OPEC+ rift, however, now appears wider than initially thought on Thursday last week, when the first OPEC+ meeting failed to reach a consensus on oil policy going forward. 

 But at least for now, few analysts believe that there will be a repeat of the brief oil price war from the spring of 2020, when the OPEC+ producers pumped at will for a month and contributed to the crash in oil prices, the effects of which are still being felt in most OPEC+ economies. 

Related: Natural Gas Prices Fall Despite Bullish Outlook

Credit Suisse, in a note late on Monday, said the current impasse about raising supply in August had the ability to push Brent Crude to $80 a barrel in the near term. Early on Tuesday, Brent was trading above $77 and WTI was up above $76 a barrel.  

“If Saudi and UAE are unable to resolve their differences, then it could lead to each man for himself approach and back to price wars, which is a draconian scenario for energy investors,” Credit Suisse analysts said. 

OPEC+ Has Much More at Stake Than Quota Baselines 

 This ‘draconian scenario’, however, is one of the most unlikely outcomes of the current deadlock, according to chief investment officers of energy funds who joined a live chat on Bloomberg on Monday with Lawrence McDonald, founder of The Bear Traps Report. 

“[T]here is a low probability of a destructive breakdown with a large boost in production, that’s not happening,” an energy fund CIO in Canada said. 

“We see strong demand (India, Europe) with real supply risk, it is not in OPEC’s interest to blow this opportunity,” a CIO in London said, noting that oil has a shot at $90 to $100 a barrel in the next six months.

Institutional investors, therefore, don’t see the OPEC+ pact breaking up, as it would be very unwise for the alliance to be sidelined as the key oil market mover again, after working for more than a year to show it is calling the shots (and burning the shorts) in the oil market.  

“We do not believe that a price-destructive “non-deal” is in the cards at this time. This is the strongest period OPEC+ has had in the market in decades and they don’t want to give that all up,” The Bear Traps Report’s McDonald notes.  

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh Salameh on July 07 2021 said:
    My reading of the public spat between Saudi Arabia and UAE is that it has far less to do with disagreement over OPEC+’s oil production increases and far more to do with the UAE challenging the pre-eminence of Saudi Arabia in the Gulf region.

    The rift between them has been simmering but undeclared since the UAE withdrew its forces from the Saudi-led war against the Iran-aligned Houthi rebels in Yemen in 2019.

    Meanwhile the UAE’s normalisation of relations with Israel last year was not followed by Saudi Arabia. On the contrary, Saudi Arabia amended on Monday its rules on imports from other Gulf Cooperation Council (GCC) countries to exclude goods made in free zones or using Israeli input from preferential tariff concessions, in an apparent challenge to the UAE’s status as the region’s trade and business hub.

    A sticking point is UAE trying to become the closest ally to the United States by joining the US-Israel-India bloc to counter the China-Russia-Iran bloc. It is also possible that the UAE might be preparing the ground for leaving OPEC though I personally discount this possibility.

    And with the end of the Saudi-led boycott of Qatar in January, the UAE continues to be disinclined to bury the hatchet.

    If the feud between the two allies escalates, Saudi Arabia may openly rebuke a deal reached by the UAE and Israel to ship part of UAE’s oil exports to European markets via the Israeli Eilat-Ashkelon oil pipeline (EAP) and will announce that it will continue to use the Egyptian SUMED oil pipeline which also connects the Red Sea to the Mediterranean and through which the bulk of Saudi oil exports to Europe pass on daily basis. Saudi Arabia will portray UAE’s use of EAP as benefiting Israel economically in terms of transit revenue and strategically at the expense of an Arab ally like Egypt.

    There is no risk that the spat between Saudi Arabia and UAE could lead to another price war. The reason is that Saudi Arabia won’t be drawn to one. In fact, Saudi Aramco announced that it has hiked the price of its Arab Light by 80 cents per barrel to Asia from July’s price. This isn’t a sign of a country wanting to engage in another price war. As for the UAE, its production isn’t that big to precipitate a price war.

    Moreover, oil prices will continue surging whether OPEC+ reaches agreement on production or not. If OPEC+ fails to reach an agreement, prices will surge further because this will deprive the market of 2 million barrels of increased OPEC+ production leading to a further tightening of the market. And if OPEC+ does eventually reach an agreement, prices will also rise because this will show its great confidence in global oil demand. Either way, OPEC+ wins.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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