From the Economist’s Chair: A Fork in the Road

Author David Fyfe, Argus Chief Economist

Opec+ Ministers failed to agree a route forward for crude production on 5 July, leaving a market that arguably needs more barrels short-term, but then seeks tighter restraint once again from 2022.

Transcript

As Brent futures rose above $75 in the week before the Opec+ meeting on 1 July, Ministers were primed to add extra physical liquidity to the market for the August to December period.

Satisfied by the orderly draw of OECD inventories back to 2015-2019 levels, Ministers nonetheless have grown increasingly sensitive to the inflationary risks from further price hikes, and are mindful that slumbering US shale production could eventually be re-invigorated if crude rises too high and too fast.

Demonstrating the ongoing agility required of the Group, they also reportedly discussed an extension of market management beyond the current expiry date of April 2022.

In the event, however, any likelihood of a rapid deal was scuppered when the UAE objected to any extension beyond next April without a corresponding renegotiation of production baselines. The Emirates seek a shift from the late-2018 baseline production levels applying to most producers to a new, higher April 2020 benchmark.

Saudi Arabia in particular was seemingly unwilling to sanction short-term production increases without a corresponding commitment to extending discipline through 2022.

Of course, Monday’s abortive Opec+ meeting may simply refocus minds, leading to an accommodation later in July or in early-August. That said, revisiting production baselines to appease UAE concerns opens an entirely new, and potentially destabilising, can of worms for Opec+.

For now, the immediate impact of renewed discord has been higher prices, as the market anticipates a delay in any extra barrels for August. Producers may be able to coalesce around a stop-gap supply increase to tide the market over until extra Iranian barrels start to arrive.

But this could make reversing course to then moderate supply for 2022 and 2023 much more difficult.

Argus Consulting’s market balances published in mid-June already pointed towards continued stock draws and price strength during third quarter 2021, before an assumed increase in Iranian production and exports for 4Q-2021 and 1Q-2022 potentially lead to renewed stock builds.

Re-accomodating Iran takes Opec+ to a fork in the road

Uncertainties abound outside of the Opec+ fold of course: neither success in the JCPOA nuclear negotiations with Iran, nor the recovery path for oil demand amid renewed rises in Covid-19 infection, is certain.

But while markets seem pre-occupied with the risks of spiralling inflation and commodity super-cycles, Opec+ potentially faces its most important decision since the darkest days of the pandemic in March/April 2020.

There is a route towards sustaining a balanced market in 2022, but it once more highlights Opec’s perpetual trade-off between price and market share aspirations.

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