The group pledged last week to increase production by a total of 2 million barrels per day (bpd) from August to December. But that deal was not ratified after the United Arab Emirates (UAE) wanted changes that would allow them to increase production by a larger amount.
OPEC +, which brings together the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, was widely viewed by the market as having succeeded in stabilizing oil prices first following the coup. to fuel demand from the coronavirus pandemic, then to boost to the highest in nearly three years.
Disagreements between band members have been rare, but not unprecedented. A clash between key members of Saudi Arabia and Russia led to a brief price war in April 2020 which, at one point, helped push global benchmark Brent futures to low. in two decades.
The current dispute is over the UAE seeking to change the baseline on which its production quota is decided, from 3.168 million bpd originally in the 2020 deal to 3.84 million bpd.
Indeed, this would allow the UAE to increase its own production by an additional 672,000 b / d on top of its share of the 2 million b / d expected by December for OPEC + as a whole.
OPEC + will resume discussions on Monday. If the story is a guide, it is likely that some sort of compromise will be found between the different parties.
The form that this compromise can take remains to be determined, but it is almost certain that it will involve the addition of more barrels than the 400,000 b / d forecast from August to December.
The question for market players is whether they think the ongoing upturn in demand is strong enough to offset the likely addition of barrels of OPEC +, as well as producers outside the group keen to take advantage of the market. current price force.
One noted bull is Goldman Sachs: The investment bank said in a June 29 report that it expects demand to increase by 2.2 million bpd by the end of the year, leaving the market facing a deficit of 5 million bpd.
This, of course, does not include the additional 2 million barrels per day offered by OPEC + last week, nor the additional barrels of compromise that the UAE may be able to achieve.
But in Goldman’s scenario, there is still a substantial supply shortage, which means prices could continue to recover.
The “known unknown” is how far the pandemic is unfolding, particularly in Asia, the main oil-importing region where demand growth so far this year has been lukewarm amid ongoing lockdowns and an apparent loss of inventory building by China, the world’s biggest crude buyer.
Imports from Asia in June are estimated at 24.24 million barrels per day by Refinitiv. That’s up from May’s 23.04 million bpd, but still below April’s 24.54 million bpd and March’s 24.79 million bpd.
From a more global perspective, the current situation does not exactly call for a massive increase in demand either. Data from commodity analysts Kpler shows total global imports of 1.858 billion barrels in June, equivalent to 61.9 million barrels per day, up from 1.947 billion barrels in May and also below the three-month moving average of 1.906 billion barrels.
With global inventories still above long-term averages, there does not appear to be a physical shortage of crude. The current rise in prices appears to be largely investor-driven and linked to a larger positive theme regarding commodities.
Brent has gained 48% so far this year and was trading around $ 76.02 a barrel in early Asian trading on Monday.
But the contract has remained stuck in a fairly narrow range around $ 74 to $ 76 a barrel for the past two weeks. It is possible that the market thinks that whatever the final OPEC + deal is, that could be enough to cap the rally – for now at least.