BAKU, Azerbaijan, July 10
By Leman Zeynalova – Trend:
Allowing one OPEC+ member to boost output may jeopardize price control, Trend reports with reference to Fitch Ratings.
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.
“While Saudi Arabia, Russia and the UAE have offered to increase the alliance’s production by 0.4 mmb/d each month from August to December, the UAE also demands to increase its baseline production (a starting point from which its cuts and increases are calculated) from April 2022 to account for its larger production capacity following investment. The country has capacity of about 4 mmb/d and this may increase to 5 mmb/d by 2030, based on its investment plans. However, the country has an OPEC+ production quota of just over 2.7 mmb/d in July.
The gridlock tests the alliance’s ability and effectiveness to coordinate output decisions. In addition to the UAE, some other countries in the alliance, such as Iraq, Kuwait and Russia, are considering investments to increase production capacity. Allowing one country to raise its baseline capacity may spur similar demands from other members and jeopardise efforts to control crude supply,” said the rating agency.
Fitch Ratings notes that although the price increases benefit crude oil producers, they are not driven by a structural deficit as about 6 mmb/d of production capacity has been removed from the market by OPEC+ and could easily be returned.
“We ultimately expect OPEC+ to agree on production increases. In addition, Iran could add about 1.5 mmb/d of supplies if US sanctions are lifted. Given the recovery of the global economy and mobility, the increased supply should mostly be absorbed by higher demand leading to a continued rundown in inventories this year. OPEC+ output policies have been the main driving force behind the oil price recovery in 2020-2021, after a sharp decline in demand in March 2020 and a short period of unilateral decisions on production volumes taken by key alliance members. Although oil demand has been recovering, emerging coronavirus variants are a risk to this recovery, making swift output decisions key to preventing sudden price drops.”
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