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A little local difficulty

6 July 2021 By George Hay

OPEC is having a difficult summer. The 13 members of the Organization of the Petroleum Exporting Countries and 10 allies including Russia, collectively known as OPEC+, on Monday failed to agree how to unwind output cuts that were put in place after the pandemic led to a collapse in global demand. Despite the unseemly squabbling, they are sitting pretty.

OPEC+ members are largely sticking to their allotted cuts. They also broadly agree on the need to increase supply next month to prevent a rapid global economic recovery from driving the price of a barrel of crude above $77. Yet Saudi Arabia, the de facto leader of the group, doesn’t want to fully unwind the 5.8 million barrels of daily cuts until the end of next year, rather than next April as scheduled: variants of Covid-19 might necessitate new lockdowns and Iranian supply may return. The United Arab Emirates will only agree if it can pump more.

Saudi is used to cash-strapped members trying to get around cuts. But the UAE is normally a close ally. It’s also a big hitter as it produces 8% of OPEC+’s 50 million barrels of daily output. The public nature of the current spat will exacerbate pre-existing rivalries between Abu Dhabi and Riyadh on issues like attracting foreign companies. Still, these are minor irritants given the sweet spot in which the producer group finds itself.

Surging crude consumption means the oil market will be in deficit until the end of 2022, Morgan Stanley reckons. Nor are shale producers, which account for the bulk of U.S. daily crude production, behaving as usual. Climate change and profitability concerns are deterring listed oil groups from ramping up output as they normally do as soon as prices rise. Rystad Energy data shows only private U.S. players are operating more oil-producing rigs. That means Saudi can enjoy high oil prices without fretting about losing market share.

It’s unlikely the spat will prompt the UAE to quit OPEC, a move that would send oil prices plummeting. More probable is that a deal is eventually secured that provisionally extends the cuts to December 2022 and allows the UAE to pump more, but fudges a final decision on both. Oil prices will stay high for a while.

 

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