On July 18th, 2021, the UAE energy minister said the world’s leading oil producers reached a “full agreement” to modestly boost output from August, ending a standoff with Saudi.
The announcement on Sunday signaled a breakthrough in an impasse over how OPEC+, a 23-member grouping of the world’s leading oil producers and allies, would proceed after limiting output last year as oil prices plummeted amid the coronavirus pandemic.
OPEC+ last year decided to withdraw 9.7 million barrels per day (bpd) from the market and to gradually restore supplies by the end of April 2022.
With the new agreement, members agreed to raise output by 400,000 bpd each month from August to help spur a global economic recovery as the pandemic eases, OPEC+ said in a press statement, adding it will “assess market developments” in December.
The deal also extends a deadline on capping output from April 2022 to the end of 2022, a provision sought by Saudi.
The UAE had hoped that by increasing its output in the short term, it could increase revenue needed to support its economic diversification plans.
Saudi has cautioned that too large an increase could put downward pressure on prices, stifling investment and leading to supply issues later on.
To overcome the disagreement, OPEC+ agreed on new output quotas for several members from May 2022, including the UAE, Saudi Arabia, Russia, Kuwait, and Iraq.
The overall adjustment will add 1.63 million bpd to supply from May next year, according to Reuters news agency calculations.
The UAE will see its baseline production, from which cuts are being calculated, increase to 3.5 million bpd from May 2022 from today’s 3.168 million but below the 3.8 million barrels a day it reportedly sought.
Saudi Arabia and Russia will see their baselines rise to 11.5 million bpd each from the current 11 million.
“What bonds us together is way beyond what you imagine,” Saudi Energy Minister Prince Abdulaziz bin Salman said. “We differ here and there but we bond.”
“The UAE is committed to this group and will always work with it and within this group to do our best to achieve the market balance and help everyone,” UAE Energy Minister Suhail al-Mazrouei said.
Abu Dhabi’s Crown Prince Mohammed bin Zayed and Saudi Crown Prince Mohammed bin Salman have been close over the years and the two leaders recently met in Saudi Arabia.
Saudi’s limit of 11 million barrels a day would rise to 11.5 million, as would Russia’s. Iraq and Kuwait saw smaller increases.
Beginning this August, OPEC+ said it will phase out its current 5.8 million barrels of oil production cuts by the end of 2022 as planned by the initial agreement.
OPEC member nations include Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iraq, Kuwait, Nigeria, Saudi Arabia, and the UAE. Members of the so-called OPEC+ include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan.
This agreement should give market participants comfort that the group is not headed for a messy breakup and will not be opening up the production floodgates anytime soon.
“If they didn’t have a deal, they would be left to their own devices and we could really see a free for all on increasing production from all of them, at a time when the return of demand still remains in question, due to the COVID-19 delta variant,” Lipow told CNBC’s “Street Signs Asia” recently.
“So the one thing that we do know is that OPEC+ did not want to see a return to prices last year in the $10 to $20 a barrel range,” Lipow said.
Prices fell to historical lows last year, as the impact of the pandemic wiped out oil demand. The West Texas Intermediate crude fell below zero for the first time, before recovering to over $10 a barrel at one point. Brent oil fell to a nearly two-decade low of nearly $20 per barrel.
This could be a buying opportunity for investors, says Lipow based on the fact that the pace that OPEC+ is restoring oil production is still slower than the increase in global demand for oil, which will support prices ahead.
Lipow said oil prices could go up to $78 a barrel for international benchmark Brent.
Credit Suisse recently raised its forecasts and now sees Brent averaging $70 per barrel in 2021, up from a prior estimate of $66.50. The firm raised its WTI forecast to $67 for the year, up from $62.
Citi, meanwhile, sees Brent and WTI climbing to $85 or higher this year.