<article><p class="lead">The Opec+ coalition <a href="https://direct.argusmedia.com/newsandanalysis/article/2235554">reached an agreement on 18 July</a> to boost crude supply from next month, ending a two-week deadlock which <a href="https://direct.argusmedia.com/newsandanalysis/article/2231518">threatened to destabilise the market</a>.</p><p>But there has been a lingering level of uncertainty within the market and among delegates regarding how baseline adjustments from May 2022 will impact production, which may need clarification. </p><p><b>What was agreed?</b></p><p>In order to phase out the remaining 5.76mn b/d of the original 9.7mn b/d production cut implemented last year, the Opec+ group has agreed to raise collective output by 400,000 b/d a month from August and to extend the current two-year pact beyond its April 2022 expiry until the end of next year.</p><p>While the group aims to fully unwind its original cut by the end of September 2022, the extension would allow for a three-month window to pause quota increases in the case of abrupt changes to market dynamics. These could include additional Iranian supplies should US sanctions against Tehran be lifted or impacts on demand from potential new Covid-19 variants.</p><p>To get the UAE on board with this extension, the group agreed that the baselines from which output adjustments are calculated will be raised from May 2022 for five of the deal's participants — the UAE, Saudi Arabia, Russia, Iraq and Kuwait. The baseline increases amount to a cumulative 1.63mn b/d. </p><p><b>What impact will the deal have on output?</b></p><p>Opec+ will add 3.6mn b/d of production to the market between August this year and April 2022 if it eases the cuts by 400,000 b/d each month. This will leave 2.16mn b/d of the original cut to phase out, which would equate to a 432,000 b/d monthly quota increase in May-September 2022 if the three-month pause is not used.</p><p>The adjustment to the five producers' reference production does not affect this monthly rise, delegates say, adding that the new baselines will only be used to determine individual members' share of this quota increase within the wider group. And these monthly increments could be lower if countries reach their maximum production capacity and are unable to produce their share of the quota rise, Saudi oil minister Prince Abdulaziz bin Salman says.</p><p>But there remains a level of uncertainty among some other member countries, with two delegates expecting the 1.6mn b/d baseline adjustment to push a portion of this volume into the market from May, in addition to the 432,000 b/d quota increase. This outcome seems less likely, as it could lead to more than the remaining 5.76mn b/d of the original cut returning to the market.</p><p><b>Why did the UAE really push for a higher baseline?</b></p><p>The adjustment of the five countries' baselines from May 2022 will do little to change their share of the monthly production increase, raising the question as to why the UAE pushed so hard to adjust its production reference. The real incentive appears to be winning a higher baseline from which to determine any future production cuts amid concerns that Opec+ could decide to reduce output in its December 2021 meeting if Iranian barrels return in full force to the market. </p><p><b>What will happen now?</b></p><p>The next Opec+ meeting will take place on 1 September, and the alliance will continue to meet monthly for the duration of the agreement to assess market conditions and decide on production adjustments for the subsequent month. </p><p>The group still needs to decide how to manage requests from Nigeria and Algeria to adjust their baselines. And it needs to formally agree on the distribution of individual members' monthly quota increases from May 2022, when the adjusted baselines come into force. A year-end review will take place during the Opec+ conference in December.</p><p class="bylines">By Rowena Edwards, Ruxandra Iordache and Nader Itayim</p></article>
