As oil prices are edging slightly lower as the market waits for a decision by OPEC+ on production policy from August, a crucial call that will draw the price direction for coming months, Louise Dickson, Rystad Energy’s oil markets analyst, has analysed the scenario
The oil and gas market got used to OPEC+ agreeing to shape policy within a day in recent months but some of the alliance’s members are now itchy to produce more of their oil, as the current high prices mean superior profits.
To produce more oil is what OPEC+ wants as well – the proposal yesterday was to boost output by two million bpd until the end of the year – albeit in a controlled and cautious way with a conservative 400,000 bpd production increase in August to start.
A production increase of up to 500,000 bpd in August would be a bullish development when compared with the demand uptick that the summer is bringing.
OPEC+ is mulling this gradual production increase and is not looking at bringing back too much production too quickly, as there is a big question mark over the demand of the shoulder autumn season. Potential vaccination delays, new lockdowns in some parts of the world and novel strain break-outs are causing some unpredictability for the speed of the demand recovery and OPEC+ has taken notice.
The gains of the previous day were trimmed in the late trading, when the UAE appeared to block the deal, demanding a higher production quota to match the lenience given to Russia and Iraq.
Negotiations today will be difficult as OPEC+ knows that if the UAE is allowed to produce from a different base, other members may protest.
The UAE’s nod is needed to shape a common policy
The UAE’s bold move will push negotiations in the coming days, and the group is now more likely to consider a higher output level, perhaps even above the 1 million bpd threshold, if the supply hawks get their way.
However, if the alliance cracks and breaks up, the exact opposite outcome will materialise, and the oil market could plunge into a very similar price crash witnessed when Russia “left” OPEC+ at the March 2020 meeting and triggered a price war.
An increase above half a million bpd could bring some downside potential for prices, especially if paired with similar supply boosts from September, as traders will rightly worry about autumn’s demand developments.
Fairness will be the word today in the OPEC+ meeting and if there are members in the alliance that believe they are sidelined, while others get their way, the meeting could drag late, and a consensus will be tough to make.
If an increase between 500,000 and 1,000,000 bpd in August starts being discussed, prices may take a moderate dip on the prospect.
