All’s well that ends well: After two weeks of tussle between OPEC stalwarts and long-time allies Saudi Arabia and the UAE over whether Abu Dhabi should be permitted to increase its baseline from which production cuts are calculated, a pre-Eid grand bargain was reached.
OPEC+ will raise its production by 400,000 barrels per day (bpd) each month through the end of next year. The UAE will be able to raise its baseline by just above 300,000 bpd from May next year. Saudi Arabia and Russia get a 500,000 bpd increase and Kuwait, as well as Iraq, can lift their baselines by 150,000 bpd.
This agreement is a win-win solution all round. The UAE gets its baseline increase, which it deemed necessary on the back of its massive investments in production capacity and the long duration of the deal.
Russia and the Kingdom get to revise their baseline upward, as does Kuwait. The two de facto leaders of OPEC+, Russia, and particularly Saudi Arabia, had adjusted their production downward significantly in line with the OPEC+ production cuts.
Let us not forget the Kingdom’s one million bpd voluntary extra cut earlier this year when the going got tough. Iraq’s upward adjustment will help with Bagdad chronically exceeding its quota.
All in all, Sunday gave an “Eid present” to international oil markets in terms of extending the agreement and a gradual release of incremental barrels.
The deal is foremost a win for the oil markets, which are currently undersupplied to the tune of more than 2 million bpd. A zero production increase out of OPEC in August would have been challenging. That being said, a fair amount of the August production has been locked in, meaning that the full relief of the new agreement will only be felt come September.
Extending the current agreement beyond April 2022 was a wise move because it extends the time horizon, giving markets predictability in very uncertain times. The latest OPEC monthly oil market report expects demand for 2021 to average 9.6 million bpd. The organization expects demand to exceed 100 million bpd towards the end of 2022. The Paris-based International Energy Association arrived at similar numbers. Oil demand is scheduled to rise by 5.4 million bpd and 3 million bpd in 2021 and 2022 respectively. Its executive director, Fatih Birol, made an impassioned plea for OPEC+ to release more crude in the light of a very tight market.
Under the new compromise, OPEC+ will consistently taper the production cuts until the remaining 5.8 million bpd which OPEC+ is still withholding are released back on the market.
While the pace may seem slow in light of a tight market, a cautious approach seems a good way forward in light of the demand uncertainties created by the fast spread of the virulent delta variant of the coronavirus disease (COVID-19), particularly east of Suez. There are also uncertainties surrounding supply, for instance how fast Iranian crude will be back on world markets if the nuclear negotiations progress. (Owing to their internal and geopolitical situation, Iran, Libya and Venezuela are currently exempt from any restrictions under OPEC+).
All in all, Sunday gave an “Eid present” to international oil markets in terms of extending the agreement and a gradual release of incremental barrels. More importantly, it proved that the OPEC+ alliance will in the end be able to reach compromise when necessary. We should not forget that it was the 9.7 million bpd production cuts, as of May 2020, which brought back to life an oil market which was essentially broken, as the pandemic engulfed the world and WTI turned negative on a bleak day in April of last year.
• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.