While news of a compromise among the main contending parties is rampant, it appears that the much-hyped internal OPEC+ oil production divide is still not resolved. International crude oil futures plunged intraday.
According to Bloomberg, on Wednesday, July 14, OPEC+ representatives said that Saudi Arabia and the UAE have reached a compromise on the oil production agreement.
Under the agreed proposal, the UAE’s new oil production baseline will be set at 3.65 million barrels per day from May 2022, up from the current 3.17 million barrels per day, while the UAE will support the Saudi proposal to have the deadline for the production cut agreement extended to December 2022 from the current April 2022, thus lifting the deadlock in oil production policy within OPEC.
OPEC+ representatives also said that OPEC+ will soon set a date for its next meeting.
Reuters also reported that Saudi Arabia and the UAE reached a compromise on a new OPEC+ oil production quota. Wall Street Journal sources said OPEC agreed to allow an upward revision of the UAE’s production benchmark as part of the OPEC+ agreement to increase production.
Following the news, international crude oil futures retreated briefly during the European stock market this Wednesday. U.S. WTI crude oil tested the $74 mark once before quickly rebounding and continuing to test $75. Brent crude oil fell briefly by about $1, down 1% at one point during the day, before rebounding quickly to regain $76.
However, in the early U.S. session, the UAE Energy Ministry denied a deal was reached, with its announcement saying that no agreement had been reached with OPEC+ on oil supply and that discussions were continuing. And then the U.S. Department of Energy released last week’s U.S. EIA crude oil inventories fell for the eighth consecutive week on a year-over-year basis, dropping by nearly 8 million barrels, almost twice as much as analysts expected.
After the EIA data was released, crude oil futures rose briefly, but quickly turned around and moved further lower. wti fell below $73 and extended its losses to more than 3% at lunchtime, reaching 4% at one point, while brent crude fell below $74 at one point, dropping more than 3% during the day. In the end, WTI August crude oil futures closed down $2.12, or 2.82%, at $73.13/barrel, the largest closing decline in the spot contract since May 19; Brent September crude oil futures closed down $1.73, or 2.26%, at $74.76/barrel, the largest closing decline since last Tuesday, July 6. Both U.S. oil and Brent oil were the lowest in the last four trading days Closing levels.
Commentators said traders are weighing news of a compromise between Saudi Arabia and the UAE. If a deal cannot be reached, they fear that oil producers such as the UAE will abandon the restrictions on production cuts and race to increase production, and if a deal is reached, it will put to rest fears that oil producers will fight a war to increase production. And even if the UAE gets permission to expand production increases, the increased supply in the oil market will probably only reach the minimum required to meet market demand.
As mentioned in last week’s Wall Street Journal article, OPEC+ cancelled its production policy meeting scheduled for last Monday after former Saudi Arabia’s close friend the UAE failed to resolve differences with other major oil producers such as Saudi Arabia, insisting that OPEC+, if it wanted to extend the duration of the production cut agreement, should first raise the production benchmark set for the country’s production cuts, thus increasing the scale of the country’s own production increases.
The breakdown in OPEC+ talks means current production limits will remain in place until August, meaning OPEC+ will not continue to increase production next month, a move that could lead to more severe supply shortages as demand recovers during the economic recovery after the epidemic hit.
Earlier this month, OPEC+’s Joint Ministerial Monitoring Committee (JMCC) recommended to OPEC+ that it increase production by 400,000 bpd per month from August to December this year and extend the duration of the deal to cut output until the end of next year. OPEC+ Upstate was forced to abandon this initial agreement for a temporary production increase due to a last-minute objection from the UAE.
If the new compromise is approved at the next OPEC+ meeting, it could boost oil production, even though some members have already largely settled on supply for August.
Ed Morse, head of commodity research at Citigroup, noted that oil prices will continue to be volatile. Even if OPEC decides to raise production in August, the oil will not reach refineries and enter the supply chain until after the peak demand period in August.