The Organisation of the Petroleum Exporting Countries (OPEC) and its allies failed to reach an agreement to extend the production cut deal beyond April 2022. Three days of dramatic dispute ended without an expected plan being reached concerning the increase of production quotas by 400,000 barrels per day which was predicted to be set for August-December 2021. The meeting of OPEC+ countries was postponed three times, but eventually ended with no agreement.
The demand for crude oil is rising along with global economic recovery and reviving business activity. This demand translates into the rise of crude prices. The Brent crude benchmark started 2021 with $50 per barrel and jumped by more than 50% over the last six months above $77 per barrel. This figure is even higher than just before COVID-19 began to rage in Europe in March 2020, despite the current lower demand. Such a favourable state of the market seen to be providing oil producing countries with significantly more profit. However, strategically high crude prices also do not sit well with producers, as high prices stimulate the slowing down of demand, and in turn assist alternative sources of energy to develop.
OPEC+ is looking for a balance in such shallow market waters, with gradual increase of crude production quotas. Last month OPEC+ raised production quotas by 350,000 bpd in June and by 440,000 bpd in July with Saudi Arabia to increase production by 350,000 bpd and by 440,000 respectively on top of this.
The July meeting was exacerbated with several factors. Increasing crude production further might be too risky as it is thought that Iran is going to reach a nuclear deal soon which will enable the country to offer more than 1 million bpd to the market. New Delta and Delta+ coronavirus strains may slow down global economic recovery and the demand for crude.
OPEC’s Joint Ministerial Monitoring Committee suggested to increase crude production quotas by 400,000 bpd from August through to December 2021 along with the extension of the OPEC+ deal beyond April 2022. So this means that the initial deal to wave 9.7 million bpd from the market in May 2020 would turn to 3.7 million bpd by the end of 2021. But, the simple decision that was agreed upon by most of OPEC+ countries stumbled as United Arab Emirates(UAE) suggested the initial level of production to calculate countries quotas needs to be changed for UAE. This position was initially supported by Mexico, Iraq and Kazakhstan amid fears that increase of crude production by OPEC+ together with Iran’s crude offer in the international oil market would exceed two million bpd and may undermine the demand, and plunge crude prices along with crude market surplus. But later they abandoned such additional claims. So, the session of OPEC+ that started last Thursday was postponed to Friday and then this Monday, but no arrangement was made.
However, the absence of the accord within the OPEC+ turned to be even worse as traders felt that the cartel and its allies are unable to make any agreement and may cease to exist in a present form. Brent crude prices soared above $77 per barrel on Monday. Technically, Brent crude prices may reach $82.7-82.9 per barrel now or above October 2018 highs.
On the other hand, it is too early to shovel a graveyard for OPEC+. Negative factors from high crude prices are now even stronger. OPEC+ has constantly displayed its ability to reach an agreement despite seemingly insuperable contradictions among its parties to reach a compromise in the end. So, it might not be an exceptional circumstance for such a compromise to be met. Nevertheless, there is a decent support for such compromise at $71-72.5 per barrel on the crossing of the daily upside trend highs and Fibonacci levels of 23.6% and 38.2%.
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