BAKU, Azerbaijan, July 8
By Leman Zeynalova – Trend:
OPEC+ deal extension beyond April 2022 would see oil prices fall substantially, Trend reports with reference to Fitch Solutions.
“July’s OPEC+ meeting broke up with no agreement on production increases for August with significant rifts between the informal head of group Saudi Arabia and long-term ally the UAE. The UAE is pushing to change its baseline production reference which would allow it to produce more while remaining consistent with the proportional cuts made by others. The UAE has brought on-line significant oil production capacity since the October 2018 baseline. Saudi Arabia’s position is that an agreement was made and it must be abided by with any deviation opening the door to erosion of the agreement. The UAE’s insistence saw them refuse to agree to other proposals and as a result would see the group’s anticipated increase in output for August evaporate along with a deal to extend the production cuts beyond its April 2022 expiry date. The bullish nature of continued undersupply and even tighter markets at first saw prices surge, although as markets began to digest the wider ramifications of the rift, oil prices fell as risk of the deal’s potential collapse is rising,” the company said in its latest report.
Fitch Solutions notes that at stake is the August production targets increase which markets had been anticipating to alleviate the building undersupply outlook and moderate oil prices.
“As the undersupply conditions build during the back-half of 2021 oil prices would be expected to climb substantially higher. The failure to bring more production online before the end of the agreement in 2022 would also lead to increased ouput from non-OPEC+ producers and strain OPEC+ cohesion further by encouraging non-compliance from the OPEC+ group at large. Longer term, an agreement to extend the cuts beyond its April 2022 expiry looks increasingly unlikely and could result in cliff edge addition of 5.8mnb/d oil rather than a controlled tapper led by market conditions. This would see oil prices fall substantially given our view for Iranian barrels to begin returning to market in 2022.
Oil prices are expected to remain volatile until clarity develops on the outlook for OPEC+ production cuts. While the risk of the least likely scenario, of a complete collapse of the agreement, is rising this most bearish event will probably not occur unless we see the current rift expanding to past grievances involving more countries. Issues such as past non-compliance and economic hardship had done little to sway the group’s cohesion but this latest and most significant rift with the UAE has the potential to scupper OPEC’s well-laid and long-term plans to manage the market. The most plausible outcome at this point is a compromise which sees more barrels returned to market in 2021 and the foundations for an extension to cuts beyond April 2022. As outlined in our Key Themes 2021 mid-year update, we had expected tensions to rise in the group though eventually cooler heads would prevail and market management would continue. This latest spat with the UAE could be a sign that our long-held view could be at risk,” said the company.
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