The OPEC+ meeting that wasn’t meant to be, and what it means for oil markets

The OPEC+ meeting that wasn’t meant to be, and what it means for oil markets

The OPEC+ meeting that wasn’t meant to be, and what it means for oil markets
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Three days of talks ended in an impasse for OPEC+, the alliance of OPEC members and 10 friendly nations led by Russia.

It all looked good on Thursday, when the grouping met for the first time: The two leaders, Saudi Arabia and Russia, proposed to hike production by 400,000 barrels per day (bpd) each month through December, and extend the current agreement scheduled through April next year to the end of 2022.

The agreement had taken 9.7 million bpd out of the market in April of last year after the WTI had turned negative. Subsequent tapering brought the cuts down to just under 6 million bpd.

The injection of extra crude is direly needed in a market currently undersupplied by over 2 million bpd. Several traders criticized OPEC+ for tapering too slowly in the face of rising demand.

However, it was not meant to be, as the UAE refused to go along with the proposal unless its baseline from which cuts are calculated was revised upwards. This request came on the back of billions that its national oil company, ADNOC, had invested to increase capacity, as well as various aggressive new joint ventures. 

The UAE argued that by the end of April 2022 the deal would be two years old, the baseline calculated in autumn of 2018 would move the duration of the agreement to four years, and new realities had been created. Others argued that as all members other than the UAE had agreed, Abu Dhabi should too.

The dissonance was played out in front of TV cameras, with ministers from opposite sides delineating their positions.

These were the internal deliberations of OPEC+. Markets, however, do not care about the sensitivities of countries or people. Markets care about hard, cold facts: In this case, how much more oil will flow into an undersupplied market.

The failure to reach an agreement means, in the short run, that as of now, there will be no incremental OPEC barrels in August, unless ministers can come up with an agreement in the very near term.

The oil price reacted accordingly, with Brent hitting $77.14 per barrel early Monday evening CEST, 1.21 percent up on the day and rising. WTI was at $76.35, up 1.6 percent.

If there is no agreement reasonably soon the question will be whether member countries will continue to adhere to the prescribed production regime. If they do, prices will skyrocket. If they don’t, we could see a race to the bottom and a resulting price deterioration.

The oil producing nations have no interest in prices surpassing $80 or higher, because it could curb economic growth, which is bad for oil demand. For consumers, fast rising oil prices mean inflationary pressures will persist, with all the implications on monetary policy and the real economy.

At the same time, it is in nobody’s interest to see a price deterioration — least of all the oil producing nations — if discipline wanes.

We should take into consideration that, even if we see an agreement down the road, uncertainties will remain on the demand side as well as the supply side: There is a question mark over the economic impact of the more virulent Delta strain of COVID-19. At the same time, potential unbudgeted new barrels from Iran may hit the market, due to the revived nuclear deal negotiations, while Libya and some others also remain wild cards.

OPEC+ has done a great job in resurrecting what was essentially a broken oil market in the spring of last year. Wildly fluctuating oil prices are neither in the interest of producers nor of consumers. In that sense, a compromise, when ministers reconvene at an unspecified date, would be in the interest of all.

• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.

Twitter: @MeyerResources

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view