As it was difficult for Saudi Arabia and the UAE to reach an agreement, the "OPEC+" ministerial meeting ended in vain.
In the short term, the direct impact of the breakdown of the talks is that "OPEC+" will not increase production in August. Therefore, it is normal for oil prices to experience stressful increases caused by supply shortages.
In the medium and long term, the different ways to resolve the "OPEC+" internal deadlock will largely affect the trend of international oil prices.
On July 5, the Secretary-General of the Organization of Petroleum Exporting Countries (OPEC) Barkindo announced that the ministerial meeting between OPEC and non-OPEC oil-producing countries ("OPEC+") originally scheduled to continue on that day was cancelled.
After this round of meetings were postponed, postponed, and restarted many times, they finally failed to reach agreement on issues such as extending the deadline for the production reduction agreement and revising the benchmark production level. The contradiction between the major member states, the UAE and Saudi Arabia, became public, which also made "OPEC+". Encountered the most serious crisis since the "price war" in March 2020.
The meeting broke up unhappily
The "OPEC+" ministerial meeting started on July 1. At the meeting, Saudi Arabia proposed that member states should increase production by 400,000 barrels month by month from August to December 2021, and change the current production reduction agreement from April 2022. Extend to the end of 2022.
According to this proposal, relevant countries will increase their production capacity by 2 million barrels per day before the end of 2021, and the overall reduction in production will be reduced to approximately 3.8 million barrels per day.
This proposal was supported by all "OPEC+" members except the UAE. In order to bridge the differences between Saudi Arabia and the UAE, the parties involved in the meeting conducted several rounds of consultations, and the meeting was postponed many times for this purpose, but ultimately failed to reach a timely conclusion. Unified agreement.
It is reported that the UAE hopes to increase production and is also willing to conditionally accept the proposal to extend the production reduction agreement, but the conditions put forward by the UAE have been rejected by the Saudi side.
UAE Minister of Energy Mazrui stated that “oil-producing countries should not rush to extend the agreement”. If the UAE is allowed to accept the agreement extension, it must increase its baseline level of production reduction from the current 3.168 million barrels per day to 3.841 million barrels per day. , Which actually increased the UAE’s production by nearly 700,000 barrels per day.
Saudi Arabia clearly opposes the UAE’s request. Saudi Energy Minister Abdul Aziz said: “The agreement extension is the primary issue. We must take into account the collective interests of all member states.” We will not sacrifice for the UAE’s demands. The overall interests of "OPEC+".
Saudi Arabia believes that once the UAE revises the benchmark level of production cuts, other member states are likely to require similar adjustments. This will lead to extremely complicated and lengthy negotiations on this issue among oil-producing countries, which will greatly affect the "OPEC+". Operation.
Contradictions between the two countries appear
As neighboring countries in the Gulf region, Saudi Arabia and the UAE have long had close ally in the political, military, and economic fields.
However, in recent years, the two countries have gradually become discordant in their domestic and foreign policies.
In the economic field, Saudi Arabia is seeking to diversify the economy, attract foreign investment, develop the business and tourism industry, and build a regional transportation hub to challenge the UAE’s position as a regional “leader” and intends to “grab the cake” with the UAE.
Especially in the recent period, Saudi Arabia first imposed a travel ban on the UAE based on the prevention and control of the new crown pneumonia epidemic, and revised the import tariff rules to cancel tariff reductions on some products from the UAE. The two countries are now on the "OPEC+" platform. The confrontation between the two countries is also considered by the outside world to be another intensification of the contradiction between the two countries.
Within the scope of the international crude oil market, Saudi Arabia hopes to maintain its status as the “leader of oil-producing countries” and hopes to prove to the market that it has the ability to lead other oil-producing countries to stabilize oil prices for a longer period of time by extending the period of the production reduction agreement. With the uncertainty of the recovery of global oil demand after the new crown pneumonia epidemic, Saudi Arabia hopes that countries can maintain a certain amount of idle crude oil production capacity in order to play a mediating and buffering role in emergencies.
The UAE hopes to gain more market share and maximize production capacity, especially as the UAE has increased its upstream investment in the oil and gas industry in recent years to increase its oil and gas production capacity.
In the past year, there have been rumors that the UAE will withdraw from the "OPEC+", which also illustrates the UAE's dissatisfaction with the "OPEC+" led by Saudi Arabia and Russia.
Increased oil price uncertainty
After the "OPEC+" ministerial meeting ended in vain, the international crude oil market reacted fiercely. In the intraday session on July 6, the price of light crude oil futures for August delivery on the New York Mercantile Exchange once soared to US$76.98 per barrel. , Reaching its highest point since November 2014.
In the short term, the direct impact of the breakdown of the talks is that "OPEC+" will not increase production in August. Therefore, it is normal for oil prices to experience stressful increases caused by supply shortages.
In the medium and long term, the different endings of the "OPEC+" internal deadlock will largely affect the trend of international oil prices.
One is to maintain the status quo.
If "OPEC+" cannot reach a new agreement and continue to implement the existing production reduction agreement, and the member states can continue to strictly implement the production reduction quota under this circumstance, the expected supply shortage in the market will intensify, and international oil prices will continue to rise during the year.
Before and after the agreement expires in April 2022, there will be huge fluctuations in international oil prices. This is undoubtedly a situation that oil-producing countries do not want to see.
The second is to reach a compromise.
What is certain is that all oil-producing countries, including the UAE, are in favor of increasing production. This is the basis for compromise. All parties may agree to a plan to increase production by December but not postpone it, or partially meet the UAE’s revised production cut baseline level. Once the "OPEC+" reaches a new agreement, it will stabilize market sentiment and effectively and quickly curb the momentum of rising oil prices.
The third is the intensification of contradictions among all parties, and the "OPEC+" alliance broke down in extreme circumstances.
Once the alliance is broken, the oil-producing countries will lift production restrictions one after another, which will undoubtedly trigger a “crude oil price war” involving multiple countries, triggering a collapse in oil prices. This is the last situation that oil-producing countries want to see.
It should be pointed out that "OPEC+" neither hopes that oil prices will plummet, nor does it hope that oil prices will soar above $80/barrel. The skyrocketing oil prices will not only stimulate the restart of U.S. shale oil, but will also slow down buyer demand to a large extent, and even affect it. Inflation expectations have hit the recovering global economy.
At present, major economies in the world are more sensitive to inflation. Rising international oil prices will not only increase the cost of the downstream petrochemical industry chain, but will also increase the shipping costs of global trade and trigger a series of price increases such as bulk commodities.
Generally speaking, for their own interests, oil-producing countries will not allow huge fluctuations in international oil prices. In order to avoid market panic, it is expected that "OPEC+" may resume talks again in the short term, and the parties are more likely to reach a compromise.
However, the conflicts between Saudi Arabia and the UAE in other areas may intensify. Whether the two sides can properly handle their differences and whether their confrontation will extend to the "OPEC+" is still worth paying close attention to.
Song Boqi, our reporter based in Riyadh