Opec+ in standoff over oil output with inflation outlook at stake

An Opec logo sits on a sign in Vienna, Austria. The Organisation of the Petroleum Exporting Countries and allies, known as Opec+, were meeting again yesterday to discuss the plans after UAE opposed the proposals, saying it wanted its quota to be higher, sources said.

Opec+ allies were locked in a tense diplomatic standoff yesterday amid a dispute that threatens to send oil prices sharply higher. A day after the alliance was forced to delay its key policy meeting, positions remained entrenched, with the United Arab Emirates still blocking a deal to increase supply, a delegate said. Failure to agree on raising output would squeeze an already tight market, risking a further inflationary price spike. Most members of an Opec+ advisory panel backed a proposal to add 400,000 barrels a day from August to December — and extend the broader supply deal later into next year — as Opec+’s full ministerial meeting finally got under way, though the UAE remained staunchly opposed, according to delegates. “If Opec+ fails to reach a compromise, the automatic fallback will be to roll over current quotas into August and beyond,” said Matthew Holland, a geopolitical analyst at consultant Energy Aspects Ltd. “That would lead to sharply higher prices, something most Opec+ members want to avoid.” The disagreement centres on how the group measures its production cuts, with the UAE demanding a higher baseline for its own curbs, according to delegates. The country is ready to accept no change in output for August if an agreement can’t be reached, one delegate said. It’s not the first time the group has faced such crises over policy, and more often than not it has been able to fudge a diplomatic solution. But a resolution this time may not be easy, because giving the UAE what it wants — essentially a much higher production limit — could upend the entire Opec+ deal that’s buttressed oil prices since the start of the Covid-19 pandemic. “Any request to adjust the production quota would be like opening Pandora’s box,” said Giovanni Staunovo, a commodity analyst at UBS Group AG. That could allow an output increase of about 700,000 barrels a day for the UAE alone, and “other Opec+ states might also request an adjustment.” Most countries also backed extending the current Opec+ deal — which is due to expire next April — to the end of 2022, according to a delegate. The UAE continued to reject that proposal, as did Mexico, delegates said. The standoff leaves the market unsure whether it will be grappling with a huge supply deficit in the second half of the year, with crude this week rising above $75 a barrel in New York for the first time since 2018. It also tarnishes the group’s carefully reconstructed reputation, raising the spectre of another destructive internal dispute — the Saudi-Russia price war that helped to crash the oil market last year. For the UAE, the baseline is a very significant issue and it will reject the Opec+ deal until there’s a change, a delegate said after Thursday’s meeting was adjourned. The Saudi is equally insistent that the extension of the agreement until December 2022 is vital for market stability next year. Failure to bridge the gap would leave the existing Opec+ deal in place, keeping as much as 5.8mn barrels a day off the market until April 2022. Oil has risen around 50% this year, with the recovery in demand from the pandemic outpacing the revival of Opec+ supplies after last year’s deep cuts. Crude’s surge, combined with a rally in other commodities, has central banks fretting about inflation again. Brent rose slightly yesterday. Opec+ is already in the process of reviving crude supplies halted last year in the initial stages of the pandemic. The 23-nation coalition decided to add about 2mn barrels a day to the market from May to July. But there was a growing clamour for the group to keep going. The group’s own data show that once-bloated oil inventories are back down to average levels as a strong revival in fuel consumption continues. Demand in the second half will be 5mn barrels a day higher than in the first six months of the year, Opec Secretary-General Mohamed Barkindo said on Tuesday. “You still need around 2mn barrels a day at least for the second half of the year to just keep the market in a reasonable sense of supply and demand balance,” Neil Beveridge, a senior analyst at Bernstein Research, said on Bloomberg TV.