After more than two weeks of haggling, OPEC+ ministers have done a deal on a new global production cap that will steady the slide in world prices last week.
The oil market had been increasingly fearful of the risks of no agreement and a price war breaking out but a deal last Friday between the main protagonists – Saudi Arabia and United Arab Emirates – paved the way for agreement on Sunday.
“We are happy with the deal,” UAE’s Energy Minister Suhail bin Mohammed al-Mazroui told a news conference, Reuters reported.
Saudi energy minister Prince Abdulaziz bin Salman telling declined to answer questions on how the compromise was reached – a sign the Saudis were forced to compromise to get a deal.
Relations between the Saudis and UAE are not good – two weeks ago the Saudis altered tariffs and other trade rules on imports to discriminate against products sourced from the UAE.
News of the deal and an extra 2 million barrels a day of output over the last five months of this year will put downward pressure on prices.
Ahead of that news of a likely deal emerging at the weekend, Brent crude settled down 12 cents at $US73.59 a barrel on Friday while in New York West Texas Intermediate (WTI) crude rose 16 cents to settle at the end of the week at $US71.81 a barrel.
For last week that saw WTI lose around 4% and Brent crude 3% in what were the largest weekly falls for five months as nervousness about the lack of a deal on a new production cap rattled confidence.
That confidence should now be restored but news of the extra production will not please some traders, especially with rising signs US production is rising – it is estimated to have risen 400,000 barrels a day in the past month.
OPEC+ (which includes outsiders led by Russia), agreed to new production quotas from May 2022 after Saudi Arabia and others agreed to a request from the UAE that had threatened the plan.
OPEC+ last year cut production by a record 10 million barrels per day (bpd) in the midst of the first stage of the Covid pandemic saw a massive slump in demand and a slump prices (especially as it came at the same time as a silly price war and volume war between the Saudis ad Russia).
The cap had been gradually reinstated supply to leave it at 5.8 million bpd in late June when talks were supposed to agree to a new cap to cover the rest of 20221 and into 2022.
But the UAE wanted a higher baseline for its production quota and this was resisted by the Saudi and the deadline for the new cap came and went with no agreement.
The new deal is that from August until December this year the group will increase supply by a further 2 million bpd or 400,000 bpd a month. That should leave the cap around 3.8 million barrels a day by year’s end.
OPEC said in a statement It aims to end the cap by around September next year.
The group agreed to extend their overall pact until the end of 2022 from an earlier planned date of April 2022, to leave more room for manoeuvre in case global recovery stalls due to the rise of new Covid variants, as we are now seeing with the Delta version.
Whilst both Riyadh and the UAE had been supportive of an immediate output boost, the UAE had rejected the Saudi idea to extend the pact to December 2022 without getting a higher production quota.
To overcome the disagreement, horse trading has seen OPEC+ agree new output quotas for several members from May 2022, including the UAE, Saudi Arabia, Russia, Kuwait and Iraq.
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.
Saudi and Russia will see their baselines rise to 11.5 million bpd each from the current 11 million. Iraq and Kuwait will see their baselines rise by 150,000 bpd each.
Nigeria and Algeria may also see their baselines revised.
OPEC+ said it will change its policy if and when Iranian oil returned to the market if the country reached a deal with world powers over its nuclear program.
Iran may add 1.5 million bpd to global supply once the deal is reached and Western sanctions are lifted. There is no sign of that happening any time soon with the new hardline administration just elected in that country.
