(Bloomberg) — OPEC+ entered a phase of tense internal diplomacy as it sought to overcome a dispute that’s blocking measures to ease rising oil prices.
As of Friday morning, the group had failed to resolve the standoff, delegates said. If the negotiations fail, the world may not get the extra crude supplies it was expecting. That would squeeze an already tight market, risking a further inflationary price spike.
“If OPEC+ fails to reach a compromise, the automatic fall-back will be to roll over current quotas into August and beyond,” said Matthew Holland, a geopolitical analyst at consultant Energy Aspects Ltd. “That would lead to sharply higher prices, something most OPEC+ members want to avoid.”
Talks between the Organization of Petroleum Exporting Countries and its allies took an unexpected turn late on Thursday. The group appeared to be heading for a deal to add about 400,000 barrels a day of crude to the market each month from August to December. But a disagreement over how the group measures its production cuts boiled over into acrimony between the United Arab Emirates and the cartel’s leaders, Russia and Saudi Arabia.
The online meeting was adjourned until Friday to find a way around the impasse. The Joint Ministerial Monitoring Committee, a subset of ministers that oversee implementation of the OPEC+ agreement, is scheduled to resume discussions at 3 p.m. Vienna time, followed by a full ministerial conference at 4:30 p.m.
Resolution may not be easy, because giving the UAE what it wants — essentially a much higher production limit — could upend the entire OPEC+ deal that’s buttressed oil prices since the start of the Covid-19 pandemic.
“Any request to adjust the production quota would be like opening Pandora’s box,” said Giovanni Staunovo, a commodity analyst at UBS Group AG. That could allow an output increase of about 700,000 barrels a day for the UAE alone, and “other OPEC+ states might also request an adjustment.”
Several delegates said the issue was so serious that it could only be resolved by talks at the highest level of government.
The standoff leaves the market unsure whether it will be grappling with a huge supply deficit in the second half of the year, just a day after crude rose above $75 a barrel in New York for the first time since 2018. It also tarnishes the cartel’s carefully reconstructed reputation, raising the specter of another destructive internal dispute — the Saudi-Russia price war that helped to crash the oil market last year.
This isn’t the first time the UAE’s ambitions have upset negotiations. Late last year, Abu Dhabi even floated the idea of leaving the cartel as it pressed to raise production. An OPEC meeting was postponed then too amid fraught negotiations, though a deal was ultimately struck.
The problem is a consequence of the UAE’s heavy investment in new additional capacity. The country’s cuts are measured from a starting point in 2018, setting its maximum capacity at about 3.2 million barrels a day. Expansion projects have since raised that number and the country wants its baseline reset to about 3.8 million barrels a day so it can use its new fields, delegates said.
The UAE argues that the change is necessary because, under the current terms of the OPEC+ deal, it is making proportionally deeper cuts than other members. The proposal on Thursday to delay the expiry of the output curbs from April to December 2022 exacerbated the issue.
Russia and Saudi Arabia, the leaders of the group, angrily rejected the UAE’s request, which came late in the negotiations and stymied a deal that was close to being finalized, delegates said.
For the UAE, the baseline is a very significant issue and it will reject the OPEC+ deal until there’s a change, a delegate said after the meeting was adjourned. The Saudis are equally insistent that the extension of agreement until December 2022 is vital for market stability next year.
Failure to bridge the gap would leave the existing OPEC+ deal in place, keeping as much as 5.8 million barrels a day off the market until April 2022 — an outcome nobody appears to want.
Oil has risen around 50% this year, with the recovery in demand from the pandemic outpacing the revival of OPEC+ supplies after last year’s deep cuts. Crude’s surge, combined with a rally in other commodities, has central banks fretting about inflation again. Brent eased slightly on Friday.
OPEC+ is already in the process of reviving crude supplies halted last year in the initial stages of the pandemic. The 23-nation coalition decided to add about 2 million barrels a day to the market from May to July. But there was a growing clamor for the group to keep going.
The cartel’s own data show that once-bloated oil inventories are back down to average levels as a strong revival in fuel consumption continues. Demand in the second half will be 5 million barrels a day higher than in the first six months of the year, OPEC Secretary-General Mohammad Barkindo said on Tuesday.
“You still need around 2 million barrels a day at least for the second half of the year to just keep the market in a reasonable sense of supply and demand balance,” Neil Beveridge, a senior analyst at Bernstein Research, said on Bloomberg TV.
(Updates with lack of progress in second paragraph)
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