Markets had been expecting the announcement of significantly more oil to cope with strong growth in fuel consumption driven by the revival of the economy, especially travel and tourism. But in its third attempt to agree on an increase in oil supply from August, the Organisation of the Petroleum Exporting Countries (OPEC+) and its allies postponed the decision until further notice, keeping markets on edge.
The market is still reeling from Monday's decision by OPEC+ to indefinitely postpone its meeting over internal disagreements. The market now fears that there could be a shortage of supply in the face of a surge in demand for crude oil this summer, driven by the economic recovery in some countries after the crisis caused by the COVID pandemic.
The impasse comes as the United Arab Emirates (UAE) is calling for a higher share of joint pumping among partners, i.e. an increase in its domestic quota. The Arab country's production increased from 3.160 million barrels per day (mbd) in October 2018 to 3.841 mbd in April 2020, and aims to produce 5 mbd by 2030.
UAE Energy Minister Suhail al-Mazrouei rejected an extension of the OPEC+ deal until December 2022, calling his country's oil production quota "unfair", according to the official Emirati news agency WAM. He added that "it makes no sense to put conditions on an increase in August" because he considered that "the market needs an increase in production". What the UAE rejects is not an increase in production in the last five months of this year, which it "supports unconditionally", but the extension of the current pact until the end of 2022. The minister was alluding to the production levels that were the starting point for the proration of last year's big cut.
The Emirates has encountered opposition to its demand mainly from Saudi Arabia, which together with Russia designed the preliminary agreement to gradually return to the market the 5.7 mbd of the cut that is still withheld, adding 0.4 mbd of crude each month (until September 2022). OPEC+ producer countries planned to increase oil production by 400,000 barrels per day between August and December. Saudi energy minister Abdelaziz bin Salman made it clear that the planned production increases and the OPEC+ extension were essential to ensure that stability. "I have been attending OPEC+ meetings for 34 years and I have never seen such a demand," the Saudi energy minister said in an interview with Al-Arabiya.
However, the task is difficult for the alliance, which must take into account the many uncertainties regarding both oil supply and demand. This means extending the validity of the current agreement, which the UAE is making conditional on an increase in its quota.
It is clear that OPEC+ is trying to do everything possible to avoid the "trauma" of what happened in March 2020, when the lack of consensus led to the break-up of the alliance and unleashed a price war that accentuated the already sharp fall caused by the coronavirus crisis. Now, until a new compromise is reached, the current agreement (valid between May 2020 and April 2022) is in force, according to Efe. This pact includes a staggered plan, which in its first stage involved leaving 9.7 mbd of crude oil in the ground, almost 10 % of the world's oil supply, in order to increase extraction gradually as energy demand recovers.
Brent crude, the global benchmark, held at a three-year high of around $77 a barrel after the cancellation, while in New York, US benchmark Texas Intermediate (WTI) crude was trading above $76 a barrel.
OPEC itself expects oil demand to be 6 mbd higher this year than in 2020, an even more optimistic outlook than the 5.5 mbd forecast a fortnight ago by the International Energy Agency (IEA). The revival of the economy, and in particular travel and tourism, thanks to the advance of vaccination in Europe and North America is behind these sharp rises.
However, the alliance's producers still see risks that could negatively affect the market, such as new outbreaks of the pandemic, especially due to the spread of the Delta variant of the coronavirus, or inflationary effects of the fiscal stimulus packages adopted by many developed countries.