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OPEC+ production plans jeopardized by another spat with the UAE

Highlights

Tentative deal to hike output through December in limbo

UAE wants significantly higher quota, causing dispute

Ministers will reconvene for negotiations July 2

An oil market wanting for crude will have to wait at least another day to hear how much OPEC and its allies will oblige.

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A deal for the OPEC+ alliance to continue gradually raising production is on thin ice, after objections from the UAE caused a fractious monitoring committee meeting July 1 to break up with no recommendation, according to sources involved in the negotiations.

Ministers will give talks another go on July 2, with the risk of another bruising market share battle top of mind.

The 23-country OPEC+ alliance had reached a tentative agreement to boost production by 400,000 b/d a month from August to December, to meet projected demand growth and cash in on oil prices that have hit their highest in nearly three years.

But what appeared to be relatively smooth discussions abruptly soured in the afternoon when the UAE requested that its baseline production level, from which its quota is determined, be hiked significantly due to the capacity additions it has made over the last three years, several sources said.

That was deemed unfair by the rest of the group, and no compromise could be reached after hours of sometimes heated debate.

"We were ready to give the market extra barrels starting in August," one delegate said on condition of anonymity. "There was strong agreement on this, until the UAE started asking for something unrealistic."

A UAE source confirmed that the request was made, as a condition of agreeing to extend the OPEC+ supply cooperation agreement from its April expiry to the end of 2022, which the other countries had also readily approved.

The UAE's baseline under the current pact, determined by its October 2018 production level, is 3.168 million b/d, but the country now claims a capacity closer to 4 million b/d. Using that figure as its new benchmark would allow the country to pump significantly more crude while remaining compliant with a higher quota.

The full OPEC+ ministerial meeting that was to have started after the monitoring committee session was bumped to July 2.

The monitoring committee, co-chaired by Saudi Arabia and Russia, will also reconvene before the full meeting, starting at 3 pm Vienna time (1100 GMT).

Fair quotas

The producer coalition has been under pressure from price-sensitive customers, such as India, and some of its own members to loosen output quotas.

Platts assessed Dated Brent at $77.26/b on July 1, a more than 50% rise since the beginning of the year and its highest since October 2018.

If agreed, the OPEC+ alliance's proposed 400,000 b/d monthly production increase would have shrunk its collective output cuts by about one-third by the end of the year to about 3.76 million b/d from July's 5.76 million b/d.

That still would figure to leave the market very tight through the rest of the summer, before the end of the driving season and autumn refinery maintenances ease demand pressures.

A potential nuclear deal between Washington and Tehran that relieves sanctions on Iranian oil sales could also throw the market into surplus, a prospect delegates say they remain wary of. S&P Global Platts Analytics expects a framework agreement reached in Q3 could result in Iranian oil exports rising to 1.5 million b/d by December from 600,000 b/d in June.

But US-Iran negotiations appear to have stalled for now.

With no immediate prospect of an Iranian crude rush and US shale companies still largely circumspect in drilling new wells, the market is reliant on the swing producers of OPEC+ to meet rising demand from the pandemic recovery.

The UAE has sparred with its OPEC+ counterparts before over how production quotas are managed and enforced. Most notably, a vehement disagreement between the UAE and Saudi Arabia at the alliance's November 2020 meeting caused talks over a production cut extension to be dragged out for days.

That came just weeks after Platts and other media outlets reported that the UAE's commitment to continued OPEC membership was wavering due to Abu Dhabi's ambitions to raise production capacity and be freed from output quotas.

OPEC+ ministers will have to decide again how to handle a UAE that is extra keen to pump its barrels and fight for market share.