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Edward Bell - Senior Director, Market Economics
Published Date: 15 July 2021
OPEC+ is reportedly nearing an agreement to break the impasse on production levels and baselines that stymied a deal earlier this month. Negotiations are apparently still continuing but would see the UAE able to operate from a higher baseline level from May 2022—up to 3.65m b/d from the 3.2m b/d at present—while the overall deal would be extended until the end of next year. We would expect OPEC+ would also increase production incrementally until May 2022, in line with the original terms of its agreement and what we had been expecting before the derailment at the July 1st meeting.
In terms of near-term impact on oil market balances and prices, a production increase from OPEC+ from September onward would largely fall in line with our projections of a market deficit of around 1.3-1.5m b/d and prices held in a USD 70-75/b range for the rest of 2021. As such, we see no immediate need to revise our oil prices or balances at this time. However, with the deal being extended until the end of 2022 the risks for oil prices in H2 2022 now look more skewed to the upside. We expect the objective in extending the deal until the end of next is for OPEC+ to provide some reassurance to markets that the producers’ bloc won’t let balances grow out of control once the initial terms of the deal expired in April 2022 amid a still uncertain outlook for demand and non-OPEC+ supply. We had tentatively penciled in a decline in oil prices for 2022 compared with this year but risks now appear tilted toward prices staying stable.
Perhaps most significantly, a deal would allow OPEC+ to maintain its integrity and remove the risk of a disorderly collapse of the alliance and the potential for another price war, similar to what markets endured in March-April 2020. While there are likely still underlying tensions surrounding production allocations among members, a visage of constructive oil market diplomacy will help keep the market focused on more tangible fundamentals, such as the considerable draw in global crude stocks and improving demand conditions.
As it stands, the deal that allows the UAE a higher baseline from May 2022 has still not been made official and OPEC+ has still not held another meeting to confirm details for output levels for the rest of 2021. But the risks of a breakdown now would be significant. In the absence of any development following the early July failure to reach a deal, markets had been seemingly pricing in a disorderly end to OPEC+ and prices had been declining. A confirmation in coming days for output from September onward—August production and export levels have largely been set by Gulf exporters already—would help to set a floor under prices and prevent any substantial declines in the short term.
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