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Too late for an August deal, OPEC+ still hopes to head off an oil squeeze

Highlights

Saudi-UAE feud continues to stymie quota agreement

OPEC+ has 3-4 weeks to forge September deal

Delegate-level committee scheduled to meet July 27

OPEC and its allies have thrown in the towel on clinching an oil supply accord for August and are now hoping for a deal to cover September and beyond, delegates told S&P Global Platts, though little progress has been made in the standoff between Saudi Arabia and the UAE.

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A delegate-level technical committee is tentatively scheduled to convene July 27, but no ministerial meeting has been scheduled as yet.

The committee is tasked with reviewing member compliance with output quotas and assessing market conditions, but is not authorized to make any policy recommendations.

Any deal on September production levels, which must be unanimously approved, would need to be signed into force by the first week of August or so, allowing members' national oil companies to set their official selling prices and allocate volumes to term customers for the month ahead.

The OPEC+ coalition has been stymied in locking in a deal for a 400,000 b/d monthly rise in production through December due to the abrupt dispute between Saudi Arabia and the UAE that emerged July 1 and has festered since.

Delegates on both sides have said the deal was whisker-close to being agreed. But Saudi Arabia's insistence that it be tied to an extension of the OPEC+ supply cooperation agreement beyond its April expiry to the end of 2022 is unacceptable to the UAE unless its output target is raised to accommodate its increased production capacity.

Backchannel negotiations are nowhere near a breakthrough, delegates said on condition of anonymity to discuss the sensitive talks.

"Very slow progress," one said.

The stalemate over plans to hike crude output means a demand-hungry market will continue to tighten over the next several weeks, if the OPEC+ alliance sticks to its July production quotas as it has committed to.

Many OPEC+ members have told or signaled to their customers not to expect increased crude supplies in the near term, despite strong interest, especially from India, according to market sources.

Saudi Arabia hiked its OSPs for its August crude loadings above market expectations, and the UAE's Abu Dhabi National Oil Co. has even issued September term allocations with a 15% cut to buyers in Asia.

But members will certainly be looking closely at their counterparts' crude export volumes over the coming weeks for any signs of a production jailbreak that could trigger a market-share race.

"Technically, [August] production should be a rollover," one delegate said.

Market crunch

The 23-country OPEC+ coalition is currently withholding 5.8 million b/d of crude production, and analysts largely agree that some of that volume is badly needed to prevent a supply squeeze that could cause prices to shoot further upwards later this summer.

Dated Brent prices have eased back since hitting their highest since October 2018 earlier this month, but are still up more than 50% since the start of the year, reflecting the world's continuing emergence from the pandemic.

The International Energy Agency delivered its latest warning July 13, noting that OECD oil inventories were "now well below historical averages" and forecasting that crude stock draws in third quarter 2021 could be the largest in at least a decade.

It estimated that OPEC+ crude production in June was about 1.4 million b/d below what the market needed to balance supply and demand.

Gasoline and diesel prices are surging, which could "put a drag on the economic recovery, particularly in emerging and developing countries," the IEA said in its closely watched monthly oil market report.

Eventually, the widening supply and demand gap could encourage those OPEC+ members capable of increasing production to flout their quotas, if there is no agreement on an orderly output rise, said Stephen Brennock, an analyst with brokerage PVM Associates.

"Every day that goes by without a deal increases the risk that members will produce more without the blessing of the group," he said.

A long-anticipated Iran nuclear deal could also relieve at least some market tightness if it can be clinched, likely after Iranian President-elect Ebrahim Raisi is sworn in Aug. 3.

Platts Analytics forecasts Iranian oil exports could increase by about 900,000 b/d by December if the US relieves sanctions.

Until then, however, the market will hinge on whether Saudi Arabia and the UAE can patch up their differences.