Why the OPEC+ Crisis Has Sparked an Oil Price Frenzy
What is OPEC+ fighting about?
(Bloomberg) -- A year after rescuing the global oil industry from the ravages of the pandemic, the OPEC+ alliance defused a fresh crisis over production levels that had raised questions about the future of the energy cartel. The rare public spectacle of key members fighting about production limits ended when Saudi Arabia clinched a deal with the United Arab Emirates in July on its demand for higher output. That ended a standoff that had thrown the market into disarray, pushed U.S. oil futures to a six-year high and threatened to deprive global markets of supplies needed to feed an economic recovery.
1. What was OPEC+ fighting about?
The Organization of the Petroleum Exporting Countries and its partners have been gradually raising production and restoring crude they halted when the coronavirus crushed fuel demand in 2020. Its plans for the 5.8 million barrels a day of output that remain offline initially ran into a snag when the UAE said it wouldn’t back Saudi proposals unless its individual target was recalculated. Abu Dhabi, capital of the UAE and seat of most of its oil production, said the quota was outdated and unfair.
2. What has the pandemic done to OPEC+?
In March 2020, OPEC+ was plunged into a brutal price war as group leaders Saudi Arabia and Russia clashed over whether the pandemic necessitated fresh production cuts. As lockdowns sent the oil market crashing, the group reached a truce and agreed to the biggest curbs in history: roughly 10 million barrels a day, or 10% of world supplies. The pandemic provoked a fight in OPEC+ last year as demand slumped before the new dispute emerged as consumption returned.
3. Why did Saudi Arabia’s ally object?
Abu Dhabi believed the agreement that OPEC+ hastily struck in April 2020 had an unsustainable inequity. While production baselines used to measure each country’s required cuts were updated for Saudi Arabia and Russia, the other 21 nations were stuck with levels set in 2018. That was an acute problem for the UAE, which has invested billions of dollars in new capacity and is keen to make use of it. The country also needs to pump sufficient volumes to ensure the viability of a recently-launched regional price benchmark, Murban. But there’s also a deeper tension between the two Middle East siblings: Crown Prince Mohammed bin Zayed is determined to carve out an independent political path for Abu Dhabi, taking it out from the shadow of its bigger neighbor.
4. What does it mean for gasoline prices?
Oil prices declined on the deal, which gives traders a better view of how quickly the cartel will restore production, although gasoline prices remain above the sensitive threshold of $3 a gallon in the U.S. OPEC+ will add 400,000 barrels a day each month from August until all the halted output has been revived. Prices have been volatile on the uncertainty, with U.S. oil futures rallying to a six-year high of almost $77 a barrel on July 6 before retreating.
5. How was the stalemate resolved?
Saudi Arabia met its neighbor halfway on the demand for a higher baseline, which will take effect -- along with revisions for some other members -- in May 2022. The UAE’s level was increased to 3.5 million barrels day, below the 3.8 million it wanted when it blocked an earlier proposed deal, but above the previous baseline of 3.17 million. The baselines for Saudi Arabia and Russia both rose by 500,000 barrels a day to 11.5 million. The compromise followed pressure from key consumers with the administration of U.S. President Joe Biden reaching out to the main players and urging them to reconcile. Typically, disputes at OPEC+ are resolved with some creative accounting and a diplomatic fudge that allows the opposing sides to save face. Still, nothing is set in stone. OPEC+ will continue to hold talks every month, including a review of the market in December, and it could adjust the schedule if required.
6. Is this the beginning of the end for the cartel?
OPEC’s obituary has been written numerous times over the past few decades, only for the organization to rise up again. The OPEC+ alliance it formed with non-members had seemed irretrievably broken when the 2020 price war erupted, yet it too is still standing. While the UAE made veiled threats last year about quitting OPEC, and the latest confrontation has been resolved, it could foreshadow future conflicts that eventually test the alliance to breaking point. The UAE’s urge to deploy its new production capacity quickly may reflect concern that time is running out for fossil fuels, as the world transitions to low-carbon energy. If the switch to electric vehicles and renewable energy brings global oil demand to a plateau, OPEC+ nations may decide to break from the alliance and pump all they can.
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