OPEC is letting the oil bears play

VIENNA, AUSTRIA - NOVEMBER 30: Qatar's Minister of Energy and the OPEC Conference President, Mohammed Bin Saleh Al-Sada (2nd L) and Secretary General of OPEC, Mohammad Sanusi Barkindo (2nd R) attend a press conference following the 171st Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria on November 30, 2016. (Photo by Askin Kiyagan/Anadolu Agency/Getty Im

Oil producers beware. Far from being bullish for prices as initially thought, the rift at the heart of OPEC and the information vacuum it has created risks sending them into a tailspin.

When the 23-nation OPEC+ oil producer alliance repeatedly failed to reach an agreement to raise production earlier this month, the concern in the market was that the world would be short of oil.

Saudi Arabia and Russia, the alliance’s largest producers and de facto leaders, had devised a plan for the group to raise its production target by 400,000 barrels a day each month until the end of the year, and possibly longer. For good measure, they wanted to extend the output pact until the end of 2022, instead of letting it expire at the end of April.

The first part looked easy. The Organization of Petroleum Exporting Countries’ 13 members and their allies agreed on the need to pump more oil to meet rising demand as the world recovers from the pandemic. But not everyone backed extending the deal, at least not in its current form.

Deepest Cut

When compared against April 2020 production, the UAE has to make deeper cuts than anyone elsehttps://www.bloomberg.com/toaster/v2/charts/de5b748768764764919627ec0bb4e181.html?brand=view&webTheme=view&web=true&hideTitles=true

Source: OPEC

The United Arab Emirates refused to do so if the alliance didn’t address what it sees as an unfairly low baseline production level from which its cuts are measured. Saudi Arabia balked at fiddling with that starting point and, more importantly, it wouldn’t approve the output increases without the extension.Sponsored ContentTake a Look at the Hybrid WorkplaceMicrosoft

It blamed the UAE for blocking an agreement to pump the extra oil the market will need in the coming months. As news of the failure sunk in oil prices soared, with U.S. West Texas Intermediate hitting its highest since 2014.

Crude Soars

Oil demand is gathering pace, as more countries from India to the U.K. ease restrictions. The International Energy Agency sees global oil use increasing by 3.1 million barrels a day between the second and third quarters, with another 1.35 million barrels a day added in the fourth.

The mood ought to still be extremely bullish, but OPEC+’s failure has left a void that’s being filled by a bearish narrative. The day after WTI hit its six-and-a-half-year high, it had dropped by $6 a barrel.

With no date set for the full group to meet again, the existing deal holds, which means no more output increases until May 2022.

But nobody sees that as credible. Even if the UAE doesn’t quit OPEC or embark on a production surge — it has said it won’t do either, at least not yet — it’s unlikely that producers will stick to their output targets when customers clearly need more of their crude.

None of the producers wants a return to the free-for-all that followed the last breakdown in their relationship in March 2020. But that’s what they risk repeating.

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