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Opec+ strikes deal to raise output from August: Update

  • Market: Crude oil
  • 18/07/21

The Opec+ coalition agreed today a deal to boost its collective output by up to 400,000 b/d each month through to the end of next year, after reaching a compromise to adjust five of its members' baseline production levels upward.

Originally set to expire in April 2022, the Opec+ group's decision to extend the deal allows for more time to unwind the 5.8mn b/d that is still being withheld to be unwound in a more gradual manner. This stepwise increase would theoretically increase the alliance's collective output ceiling by 2mn b/d by the end of the year, and pave the way for the remaining 3.8mn b/d to return by September.

The extension to December, however, would allow Opec+ the option to pause the output hikes for up to three months in response to any abrupt changes in market dynamics — such as a return of Iranian volumes in the event of a lifting of sanctions on Tehran, or the possible emergence of new strains of Covid-19.

The agreement was brokered in a virtual ministerial meeting today, ending a two-week output policy impasse centred on a demand by the UAE for its baseline to be revised. The UAE, now Opec's third largest producer behind Saudi Arabia and Iraq, complained at the previous Opec+ meeting in early July that its original baseline was "outdated" and said it would object to an extension beyond April 2022 unless Opec+ agreed to revisit its baseline, and in turn, how its production quota is calculated.

As a compromise, the group agreed to adjustments in baselines from 1 May 2022, not just for the UAE but also for four other members: Saudi Arabia, Russia, Iraq and Kuwait. The changes will lift the combined baseline levels of production of the five countries by a combined 1.633mn b/d from May next year, with Russia and Saudi Arabia accounting for almost two thirds of the increase.

The UAE will now see its baseline reference rise to 3.5mn b/d from May 2022, up 332,000 b/d from the original 3.168mn b/d level it accepted when the deal was first struck in April 2020, but still well below the near 4mn b/d it says is its current capacity. Argus assesses the UAE's production capacity at around 3.85mn b/d.

The baselines for Saudi Arabia and Russia will both rise by 500,000 b/d to 11.5mn b/d from 11mn b/d previously — even as the latest IEA report flagged that Russia had "never pumped anywhere close" to its original 11mn b/d baseline. Opec producers Kuwait and Iraq will see their baselines rise by 150,000 b/d from 2.809mn b/d to 2.959mn b/d, and by 151,000 b/d from 4.652mn b/d to 4.803mn b/d, respectively.

Two other countries — Nigeria and Algeria — both made cases at today's meeting for baseline adjustments, according to Saudi oil minister Prince Abdulaziz bin Salman and two other Opec+ delegates, but decisions on the two requests have yet to be taken. Algeria's current baseline stands at 1.057mn b/d, while Nigeria is 1.829mn b/d.

"When we decide, we decide as a whole group," said energy UAE minister Suhail al-Mazrouei today. He added that the UAE had always been a committed member of Opec+, and praised the country's relationship with its de-facto Saudi Arabia. Bilateral talks with the kingdom were "always an enabler for us to reach understanding quicker," he said.

The Opec+ coalition's compliance with its June obligations slipped to a five-month low of 112pc in June, down from 114pc of May, according to an internal document seen by Argus. Opec conformity eased from 124pc in May to 120pc last month, while their non-Opec counterparts increased compliance from 93pc in May to 97pc in June. Opec+ conformity figures are an average of the production estimates of six secondary sources, including Argus. An Argus survey pegged Opec+ compliance at 111pc last month, with Opec country conformity at 120pc, and non-Opec participants at 96pc.

Here to stay

The Saudi oil minister also endorsed the staying power of the Opec+ coalition, reiterating it is "here to stay," and said the group's monthly ministerial meetings will be an ongoing feature. He reassured that Opec+ would "continue attending to the market", if required.

"We hope to continue this process of balancing the market, not only for the first half of this year, but for the entire period of the next year too, because a unlike some of our colleagues and friends in banks and consultancies who try not to look beyond the tip of their noses, we look at these things for a least a year, a year-and-a-half, just to ensure that we get the balances right", Prince Abdulaziz said.

The group's ministers are scheduled to next meet on 1 September.


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