Energy prices rise after OPEC + struggles to strike a deal

Flames burn at an oil processing plant in the Saudi Aramco oilfield in the Rub ‘Al-Khali Desert in Shaybah, Saudi Arabia, in October 2018.

Simon Dawson | Bloomberg | Getty Images

Energy prices hover above the $ 75 level after OPEC and its allies failed to reach a key deal on their oil production policy last week amid mounting tensions between Saudi Arabia and the United Arab Emirates.

Crude prices are experiencing some volatility after an initial spike, but retreated slightly on Monday. Brent futures fell 0.11% to $ 76.09 per barrel, while US crude futures fell 0.13% to $ 75.06 per barrel.

The energy alliance, often referred to as OPEC +, will meet again on Monday after failing to reach an agreement twice last week.

Without a deal, oil prices could skyrocket and threaten to derail a fragile economic recovery. If the talks fail, there could also be a price war – although analysts don’t think the latter scenario is likely.

Why oil prices have skyrocketed

The United Arab Emirates – a longtime ally of OPEC chief Saudi Arabia – opposed the deal twice last week, according to Reuters.

The deal includes an agreement to gradually increase oil production, while extending the duration of the broader cuts the group agreed to in 2021.

Last year, to deal with falling demand as the Covid crisis hit and people travel less, OPEC + agreed to cut production by nearly 10 million barrels per day from May 2020 at the end of April 2022.

How the deal ends will matter to the markets. An unambiguously bullish outcome would be if the group simply chooses to stick with the initial reduction timeline.

Helima croft

Head of Global Commodities Strategy, RBC Capital Markets

At last week’s meeting, OPEC hub and non-OPEC leader Russia also offered to extend the duration of the cuts until the end of 2022, according to Reuters.

Major producers Saudi Arabia and Russia had reached a preliminary deal, which would in principle increase supply by 400,000 barrels per day from August to December 2021 in order to meet growing demand, Reuters reported, citing from anonymous sources.

What the United Arab Emirates want

The United Arab Emirates “unconditionally” supports an increase in production, its energy and infrastructure minister told CNBC on Sunday.

“The issue is a condition for this increase, which is the extension of the deal,” Suhail Al Mazrouei told CNBC’s Hadley Gamble, adding that the current proposal “was just not a good deal” for the Emirates. United Arabs.

At the heart of the matter is the baseline. Reductions or increases in production are measured against a baseline – the higher this number, the more oil a country is allowed to pump.

The UAE wants their baseline revised before extending these reductions until the end of 2022, as they want to produce more than what is now allowed based on their current baseline quota.

The current benchmark set for the United Arab Emirates was taken from October 2018, when they were producing around 3.2 million barrels per day. Last year the number jumped to 3.8 million barrels per day.

The UAE argues that the terms of reference for the 2022 extension should not be repeated from four years ago.

“Now we believe that to tie the extension of the agreement for a reference which goes back to 2018 and for a period which starts from 2022, is just not realistic, because it is four years,” Al Mazrouei said. at CNBC.

“It’s totally unfair.”

The UAE has spent billions to invest in its oil production capacity, seeking to increase production. However, countries will only be able to renegotiate their baselines at the end of the current production deal – which Saudi Arabia and Russia now want to extend.

Why is this important

If OPEC + fails to strike a deal to increase production, prices could skyrocket.

Rising oil prices could destroy growth in demand at some point and risk resuming economic growth just as several economies begin to reopen after the rise in Covid vaccinations.

A “bullish” result for oil prices would be if the group sticks to the original deal – without increasing production, according to Helima Croft, head of global commodities strategy at RBC Capital Markets.

“How the deal ends will matter to the markets. A clearly bullish outcome would be for the group to simply choose to stick to the original cutback schedule and signal its intention to keep 5.8mb / d off. market until April 2022, “she wrote in a statement. remark friday.

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However, RBC Capital Markets says the outlook for $ 100 a barrel oil is so “politically unpleasant” that US administration officials “will call on key stakeholders to try to prevent fireworks. virtual Monday “.

On the other hand, a price war could also be imminent, if the talks go wrong.

“If the talks end in utter disharmony, there is a risk of a return to a self-help production scenario that could cause a reversal in this year’s oil price hike,” Croft wrote. “We don’t see this as the likely outcome, but neither can we rule it out entirely. It is certainly not a black swan scenario.”

“So in the very short term, a lack of agreement would obviously mean that all production is loose, and that everyone is close to a price war”, Alejandro Barbajosa, vice president of crude Middle East and Asia -Pacific at Argus Media, CNBC told CNBC on Monday.

He added, however, that he doesn’t think “OPEC is going to come close.”

– Additional reporting by CNBC’s Sam Meredith, Dan Murphy and Hadley Gamble.

Correction: This article has been updated to accurately reflect that the current baseline for the United Arab Emirates was taken as of October 2018.

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