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.
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:
TRADE FLOWS
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”.
PRICES
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.
INFRASTRUCTURE
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.
Source: Platts