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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