OPEC and its allies clinched an agreement July 18 to raise crude oil production in the coming months, while also allocating five members more generous output quotas starting May 2022, resolving a dispute with the UAE that had threatened to destabilize the oil market and the organization itself.
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Under the deal, the 23-member OPEC+ coalition will ease its production cuts by 400,000 b/d each month starting in August, amounting to a 2 million b/d total increase by the end of the year.
That will help relieve a market that analysts say has grown increasingly tight, with global oil demand on the rise due to seasonal factors and the world's continued emergence from the pandemic.
The deal also extends the OPEC+ supply management pact to the end of 2022, from its previous expiry of April 2022.
In an appeasement to the UAE, the country will receive a 332,000 b/d boost to its reference production level, from which quotas are determined, starting in May 2022. But Saudi Arabia and Russia will also be granted 500,000 b/d baseline increases, while Iraq and Kuwait will get 150,000 b/d rises, in a surprise compromise.
Saudi energy minister Prince Abdulaziz bin Salman also revealed that Algeria and Nigeria have applied for reviews of their baselines, which will be determined later.
The effect will be a potentially sizeable bump in OPEC+ production in the latter half of 2022, when the alliance hopes that the global oil market will have fully recovered from the pandemic.
The coalition has been gradually rolling back its historic production cuts, from 9.7 million b/d in the worst of the pandemic last spring and summer, to the current 5.8 million b/d.
If the 400,000 b/d monthly output increases go forward, the remaining collective OPEC+ cuts will be erased by September 2022, but ministers said they will monitor market conditions and adjust supply as needed to prevent balances from getting too far off kilter, whether due to overproduction or resurgent COVID-19 cases. The pending resumption of US-Iran nuclear deal negotiations will also bear watching, if sanctions are eventually relieved on Iranian oil sales.
The next OPEC+ meeting has been scheduled for Sept. 1.
"Today we made a decision for the market to restore production to a pre-crisis level," Russian energy minister Alexander Novak told the Russia 24 network after the meeting.
For more than two weeks, the UAE, which has made substantial upstream investments in recent years, had complained that it was bearing an unfair burden of the OPEC+ cuts, based on the percentage of its production capacity it has been forced to keep offline, compared to other members. Its protest had held up the production accord, leaving traders guessing on how much OPEC+ crude to expect.
Saudi Arabia, the de facto leader of OPEC, had rebuffed the UAE's request, wanting to hold the line on output baselines to preserve unity and prevent other members from also asking for higher quotas.
The feud was unusually public and bitter, with Prince Abdulaziz and UAE energy minister Suhail al-Mazrouei staking their claims on dueling television interviews. A flurry of bilateral and multilateral talks in recent days was able to broker a deal, delegates said, just in time for the Eid al-Adha holiday.
After the OPEC+ meeting, both ministers were keen to display their bonhomie.
"The UAE will remain a committed member in the OPEC+ alliance," Mazrouei told reporters in a press briefing. "This group is a strong group, and we will always work within this group to do our best to achieve market balance and help everyone."
Prince Abdulaziz declined to reveal how the deal was negotiated in the closed-door virtual meeting, saying: "This is an art, and we keep it amongst ourselves."
But he said the agreement would be reviewed in full in December and that the extension provides ministers with more flexibility to adjust the schedule of production increases, if market conditions warrant. OPEC+ market management could even go beyond the deal's 2022 expiry, he added.
"I am a believer of OPEC+," he said. "OPEC+ is here to stay."
Winding down the cuts
According to an analysis prepared by the OPEC secretariat and seen by S&P Global Platts, holding to the agreed production increases will flip the market from deficit to surplus by the first quarter of 2022.
The analysis assumes global demand growth of 6 million b/d in 2021 and 3.3 million b/d in 2022, and sees OECD oil inventories ending this year at 122 million barrels below the 2015-2019 average that the group is targeting before rising to 10 million barrels above by the end of 2022.
Oil prices, which have been on a steady rise for months, wobbled over the OPEC+ stalemate, with traders weighing the prospects of the coalition overtightening the market by continuing its cuts or devolving into a pump-at-will market share battle.
The September/October spread for Dubai crude prices blew out from 73 cents/b on June 30, the day before OPEC+ ministers began their negotiations, to $1.53/b on July 9, the highest since January 2020, and has since pulled back to $1.37/b on July 16, according to Platts assessments. The spread widens further with the November prices.
The strong backwardation in Dubai indicates robust prompt demand for Middle East sour barrels amid tight supply, before the market potentially loosens in later months.
Unit: million b/d
Notes: OPEC members Iran, Libya and Venezuela are exempt from quotas, as is non-OPEC Mexico. Quotas are determined as a percentage of baseline levels.