OPEC+ meeting goes awry, UAE suddenly changes its mind

On Thursday, July 1, the Joint Ministerial Monitoring Committee (JMMC) meeting of OPEC+, a coalition of oil-producing countries led by Saudi Arabia and Russia, took place, with analysis widely pointing to one of the most important meetings of the year in the crude oil market, which will determine oil production policy for the rest of the year.

It is worth noting that the situation took a dramatic reversal before the closing of WTI crude. An OPEC+ representative suddenly said that OPEC+ will postpone its plenary session until Friday, as an agreement is still difficult to reach. The one-day extension of JMMC will be held on Friday at 9pm BST and the OPEC+ plenary session will be held at 10:30pm BST.

This is mainly due to the UAE, Saudi Arabia’s traditional Gulf ally and a key member of the OPEC group, swooping in to oppose the preliminary agreement that Saudi Arabia and Russia have spearheaded, demanding changes to their own country’s production cut benchmarks when the last-minute meeting was scheduled to wrap up. This forced the much-anticipated OPEC+ meeting to be postponed until Friday to resolve the internal dispute, and Thursday has temporarily adjourned without giving any policy recommendations.

Some analysts pointed to the unexpected turn of events as a source of confusion and were unsure whether the news earlier the same day that OPEC+ would collectively increase production by a total of 2 million barrels per day from August to December would be approved.

The UAE is reportedly seeking to revise upwards the country’s crude oil baseline (baseline) production in the OPEC+ deal to about 3.8 million bpd, and the new cut baseline would allow the UAE to produce an additional 700,000 bpd, with the UAE insisting on negotiating with a new cut baseline. This represents a request for more production from the UAE, which has previously felt it was “disproportionately burdened with production cuts.

In the end, the WTI crude oil futures August contract closed up $1.76, or 2.40%, on Thursday to close at $75.23 per barrel, still the highest since October 2018. The international Brent crude oil futures September contract closed up $1.22, or 1.63%, to close at $75.84/barrel.

Earlier news that OPEC+ had proposed to increase production by 400,000 barrels per day per month from August to December, WTI rose above $76 for the first time in nearly three years

At the beginning of Thursday’s U.S. session, an OPEC+ representative told the media that JMMC proposed to gradually increase oil production, and that production will increase by 400,000 barrels per day per month from August to December this year, equaling a total of 2 million barrels per day by the end of the year, and proposed to extend the production cut agreement to the end of 2022.

Earlier there were also representatives who said that JMMC did not base its discussions on increasing production by the end of the year, but instead focused them on long-standing compensatory cuts, additional cuts that some countries have been forced to make to compensate for past delays in implementing tapering actions.

This increase was lower than expected by the market, which had thought OPEC+ would plan to increase production by 500,000 to 1 million barrels per day from August onwards, while more widespread expectations were for an increase of 500,000 bpd. Last week’s Bloomberg survey data showed that the market expected OPEC+ to increase production by 550,000 bpd in August, which is only 1/4 of OPEC+’s own projected global supply shortfall for the month.

International oil prices have already reacted by rising to a nearly three-year high before the US market today as OPEC+ production increases for the rest of the year fail to keep pace with the rapid rebound in demand, resulting in continued tightening on the supply side.

U.S. oil WTI broke through $76 per barrel for the first time since October 2018, with a maximum intraday gain of $2.75 or 3.7%, breaking through the three integer barriers of $74-76 in quick succession, with a daily high of $76.22. International Brent oil prices also set new highs from October 2018, breaking above two hurdles of $75 and $76, with a maximum intraday gain of $2.09 or 2.8%, and a daily high of $76.71.

Then, as the dollar index touched a new three-month high since April 6, 2021 to 92.55, international oil prices in dollar terms narrowed to more than 1%, with U.S. oil WTI once back below $75, and Buna oil back below $76.

The OPEC+ meeting in early June decided to further reduce the size of the joint production cut in July according to the original plan, increasing production by 840,000 barrels per day in July to complete the phased increase of a total of nearly 2 million barrels per day from May to July, but since then international crude oil futures have angled higher.

Saudi Arabia has repeatedly called for a cautious resumption of production increases, and the rebound in oil demand outpaced the increase in production to support the surge in oil prices this year

As mentioned by Wall Street News, the Saudi energy minister repeatedly stressed the need for a cautious resumption of production increases when he attended an event two weeks ago, saying that Saudi Arabia’s cautious approach to resuming OPEC+ crude oil production had been proven correct, and that it was still too early for the crisis to be over, and that he still insisted on seeing clear evidence of a strong recovery in demand before acting, “We are not out of danger yet. “

Meanwhile, Russia, a key member of OPEC+, has been supportive of increasing production. Media reports last week said Russia was considering proposing an OPEC+ production increase at the July meeting because it expects to see a global oil supply shortage in the medium term.

Chris Midgley, head of global analysis at S&P Global Platts, told the media that Saudi Arabia would prefer to see global demand increase before increasing production and remains concerned about when Iranian oil will return to the market, so it will remain cautious about its oil production policy. Too much supply.

Stephen Brennock, oil analyst at PVM Oil Associates, said the global oil market, including the International Energy Agency IEA, has called for a significant increase in supply, but OPEC’s “big brother” Saudi Arabia is unlikely to agree. Morgan Stanley chief oil analyst Martijn Rats also pointed out that OPEC should be cautious, because the next 18 months need to deal with some real uncertainties, namely the exact trajectory of demand recovery, whether Iran can resume crude exports, and whether rival U.S. shale oil to take advantage of high oil prices and increase production.

Leaving aside the supply-side game mentioned above, there is also uncertainty on the demand side of the crude oil market, despite annual reports from international organizations such as OPEC and the IEA being bullish on global oil demand growth in the second half of the year. In particular, the Delta New Crown variant virus has been raging since May, sweeping Europe and then spreading to the Asia-Pacific region, and several countries have announced the restart or extension of the embargo. OPEC Secretary General Barkindo also warned this Tuesday that the variant New Crown virus could pose a risk to the oil market.

But the overall global trend this year is that oil demand is rebounding faster than the rate of increased supply production, and the continued supply gap is supporting higher oil prices. International oil prices have risen more than 50% so far this year, and have accumulated an 80% gain over the past year, in contrast to the first wave of the epidemic, which briefly turned negative at its peak.

Wall Street News previously mentioned, “commodity flag-bearer” Goldman Sachs since March this year, said the fall in oil prices is a good opportunity to buy, and predicted that Brent crude oil will reach $ 80 per barrel this summer. Goldman Sachs also in May when the oil price retreat, once again reiterated that oil prices will rise to $ 80 per barrel, can be described as a firm confidence.

The bank’s latest research report this week said that by the end of this year, oil demand is expected to increase by another 2.2 million barrels per day from the current level, making a supply gap of up to 5 million barrels per day, and OPEC will have to continue to increase production. Otherwise, the global oil market is currently facing a shortfall of 2.3 million barrels per day, with remaining stocks falling to 330 million barrels, a surplus that will disappear within three months at the current rate of oil consumption.

Meanwhile, Wall Street traders have begun betting on $100 per barrel calls on crude delivered in December 2022. Bank of America recently joined the “crude flaggers” and believes oil prices could soar above $100 before the end of the current cycle. This rally will not slow down soon, as demand is “accelerating” and supply-demand imbalances are rapidly leading to the risk of a tightening market.