BAKU, Azerbaijan, July 7
By Leman Zeynalova – Trend:
Oil prices may fall to $40-$50 if OPEC+ deal collapses, Trend reports with reference to the UK-based Capital Economics research and consulting company.
“The recent failure of OPEC+ to agree new production quotas has increased uncertainty around the outlook for global oil supply. In our view, there are three potential scenarios for the group’s output over the coming months. Despite several days of negotiating, the 18th OPEC and non-OPEC (OPEC+) Ministerial Meeting was officially ‘called off’ yesterday. The main sticking point was the UAE’s opposition to the joint Russia-Saudi plan to gradually raise the OPEC+ production quota by 400,000 bpd per month from August to December 2021 and extend the current supply pact to end-2022 (rather than end-April 2022 as initially agreed). The UAE wants a higher starting point for its quota to reflect the fact that its production capacity has increased since the original October 2018 baseline. As it stands, July’s production quotas would remain in force until the end of April 2022. Under this scenario, OPEC+ would be obliged to keep around 3m bpd of its production offline compared to pre-virus levels. Assuming that global oil demand revives later this year as travel restrictions (both domestic and international) are progressively lifted, we estimate that the rollover of the July quotas would deepen the global market deficit to around 2.5m bpd in Q3 and Q4 2021. This would intensify the downward pressure on global stocks and boost oil prices,” said the company.
In the second scenario, some sort of deal is reached in the coming weeks. “We think this is the most likely outcome. OPEC has always had a remarkable ability to come up with creative compromises. At the same time, there is diplomatic pressure from the US to reach an agreement. Officials from the Biden administration have been engaged with relevant capitals to urge a compromise solution”.
Meanwhile, Capital economics believes the most extreme scenario is if the entire agreement falls apart and all OPEC+ member states increase production as much as possible.
“The UAE may even decide to leave OPEC. It is not completely clear how much production capacity each member state has, but output in April 2020 (the last time the OPEC+ agreement fell apart) reached 42.6m bpd, significantly higher than the 35.5m bpd that we estimate was produced throughout June. If realised, this would swing the market from its current deficit into a sizeable surplus and we think prices would initially plummet, before stabilising near the marginal cost of production which is roughly around $40-50 per barrel. All told, we suspect that the UAE and the rest of OPEC+ will reach a compromise agreement to gradually increase production. If this is not achieved, the current quotas will either remain in place until April 2022 or the agreement will fall apart. Either way, we expect OPEC+ production to rise before long and for oil prices to ease back from their current multi-year highs.”
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