Why did OPEC+ fall into turmoil when oil prices climbed?

OPEC+ Group failed to reach an agreement to increase oil supply, which promoted Crude oil prices Reach the highest level in at least three years.

The international benchmark Brent crude oil hit US$77.84 per barrel on Tuesday-the highest point since 2018-while the US benchmark West Texas Intermediate crude oil hit US$76.98 per barrel-the highest point since 2014.

Why did OPEC+ member countries withdraw?

The group agrees that it is necessary to increase oil production because demand has begun to exceed supply. But the United Arab Emirates is one of the strongest members of the group after Saudi Arabia and Russia, and it opposes the extension of the agreement reached for the first time in April last year—when oil prices plummeted—unless the group agrees to review the UAE’s calculated production targets.

When the group wants to increase supply anyway, it seems to be a small objection, but the UAE has invested billions of dollars to increase production capacity. It believes that the so-called baseline used to calculate its production targets is outdated and does not reflect the new capacity, which means that it cuts more supply proportionally than other members.

The country’s energy minister stated that it will stick to its initial baseline until April 2022 (the expiration point of the agreement last year), but cannot agree to a further extension without modification. Saudi Arabia, which is usually one of its closest allies, hopes to extend the agreement until the end of next year to make the market clearer.

The UAE has a point of view. However, if the organization agrees to review a country’s baseline, then all other members of the alliance will feel pressured, and some people will not like the result.

Russia is not a member of OPEC and has been cooperating with the organization since 2016. But it is one of the countries whose production targets may be subject to such scrutiny.

Tensions between Saudi Arabia and the UAE are also increasing, and they increasingly see each other as Competitor In the bay area.

“The most staunch allies not long ago, these two Middle Eastern countries now have different views on many issues: the war in Yemen, relations with Israel or Qatar, and Saudi Arabia’s intention to compete with the UAE as a regional business and tourism center,” said the oil broker. Said Tamas Varga of the company PVM.

What’s next for oil prices?

They have already jumped. The group plans to increase its monthly output by 400,000 barrels at least before the end of this year, adding 2 million barrels per day (or about 2% of pre-pandemic demand) back to the market, and gradually withdraw from the huge 10 million barrels. A daily cut in production was agreed on when the pandemic hit last year.

If no agreement is reached, the default option is to keep output unchanged, which means that as demand picks up, the oil market will tighten in the second half of this year. Many banks predict that oil prices will easily rise above US$80 per barrel—up more than 50% since January and higher than the price of transactions before the pandemic.

The biggest risk is that if this disagreement is not resolved, it will undermine the cohesion of the group and cause producers to begin to ignore output goals.In extreme cases, this may even lead to Price warFor example, in March last year, Saudi Arabia opened the tap after disagreements with Russia on how to respond to an emerging epidemic.

But Saudi Arabia may prefer higher prices. Analysts close to Saudi Arabia said that Riyadh hopes to incentivize other producers to invest because of concerns about the imminent supply gap.

Think of it as Goldilocks’ strategy. Saudi Arabia wants prices high enough to encourage investment, but it does not want prices high enough to accelerate the adoption of renewable energy and the end of the oil era.

Will rising oil prices encourage other producers to increase production?

Maybe, but not soon. Oil giants such as BP and Royal Dutch Shell are affected pressure Reduce oil and natural gas production, and increase investment in renewable energy. When oil demand is expected to peak in the next ten years, investing in large, long-term projects—possibly with a 50-year lifecycle—seems not feasible.

But the deadlock does increase the risk that demand will grow faster than supply before that moment, especially if non-OPEC oil-producing countries have not stepped in to fill the gap. “If this is any other cycle in the past 50 years, non-OPEC oil-producing countries will now restart projects and raise capital expenditure guidance. This is not the case this time,” said Martijn Rats, an analyst at Morgan Stanley.

Citi’s Edward Morse said that in the end, further price increases may encourage US shale oil producers to “regroup in 2022.”

What about the broader market?

The return of inflation has been a hot topic in 2021, and rising oil prices have exacerbated these concerns. Gold, traditionally regarded as a hedge against inflation, rose 1% on Tuesday to $1,805.71 per ounce.

In addition to putting pressure on consumers, rising oil prices may further “damage the economy [US Federal Reserve’s] Jeroen Blokland, who previously worked as an analyst at asset management company Robeco, said that most of the current surge in inflation should be considered temporary. But he warned that OPEC+ may be aware of the risk of prices rising too fast, which will make the market feel uneasy.

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