OPEC+ abruptly canceled its meeting July 5 with no new date set after Saudi Arabia and the UAE failed to agree on the terms of a deal that could see 400,000 b/d of extra production each month added to the market from August.
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The dispute centers around the UAE's demand for its baseline -- the level used to calculate its quota -- to reflect closer its 4 million b/d of capacity. S&P Global Platts Analytics is optimistic a resolution will be found.
"Saudi Arabia and the UAE maintain a mutually beneficial interest in preserving OPEC+ cohesion and balancing oil markets, which combined with a geopolitical alliance in the Middle East makes a near-term compromise a plausible outcome," said Paul Sheldon, chief geopolitical adviser at Platts Analytics in a note July 5.
Below is a breakdown of some of the key issues at play:
Why the UAE wants a larger share of the revived market.
- The coronavirus pandemic forced OPEC+ to drastically cutback production over the last 18 months. The easing of lockdowns has prompted a potential shift in policy.
- OPEC+ -- including countries excluded from quotas such as Libya -- controls over 40% of global production accounting for 38.92 million b/d of crude in total in May, according to the latest S&P Global Platts survey.
- Platts Analytics forecasts a further 8.8 million b/d of demand could be added between June and December.
- UAE energy minister Suhail al-Mazrouei said he supports an increase in output but argues the UAE baseline of 3.168 million b/d is too low.
Failure to reach a consensus -- all OPEC+ decisions must be unanimous -- would revert the alliance to its existing production agreement.
- The coalition of 23 producers including Russia is currently withholding 5.8 million b/d of output.
- Compliance across the group had remained strong at 111.45% in May, according to the last Platts survey.
- Medium-term it could encourage some producers needing to boost revenue to ease back on compliance.
- Mazhar Muhammed Salih, an advisor to Iraqi Prime Minister Mustafa al-Kadhimi, told the state-run Iraqi News Agency that no deal could result in "the beginnings of a price war".
Analysts have warned about the risks of oil climbing to $100/b before the current deadlock in talks within the OPEC+ group.
- ICE Brent futures at highest since Oct. 30, 2018, trading at $77.16/b at 1700 GMT and have been hovering near three-year highs in recent days.
- Dated Brent assessed by Platts has climbed 56% since January as demand rebounded and OPEC+ production restraint weighed on fundamentals.
- Before the current impasse, Platts Analytics said last month it saw Brent crude supported above $70/b into July.
- July 4 holiday in the US may have eased price pressure and impact.
Timing of OSPs from major Persian Gulf producers brought into focus by OPEC+ deadlock.
- Abu Dhabi National Oil Co on July 1 issued its OSPs, setting its flagship Murban crude oil at $72.34/b for August loadings.
- ADNOC said to have cut term supply for Murban, Das Blend, Umm Lulu and Upper Zakum grades for loading in September by up to 15%, several sources told Platts on June 29.
- Saudi Aramco has yet to release its OSPs for crude exports for August, as market sources said the company was likely awaiting result of the OPEC+ meeting before issuing them.
At the heart of the issue is the UAE's massive investment in new capacity and downstream infrastructure.
- ADNOC is spending $122 billion up to 2025 on growth projects including a 25% ramp-up in its production capacity to 5 million b/d by 2030.
- The Abu Dhabi producer is also planning to invest $45 billion to expand downstream operations at the UAE's largest refinery in Ruwais, which will eventually have capacity to produce 1.5 million b/d of products.
- On March 29, the Intercontinental Exchange, ADNOC and nine other partners launched the Murban futures contract on ICE Futures Abu Dhabi, setting into motion a process that requires more barrels of the grade for its success.