0316 GMT: Crude oil futures extended overnight gains during mid-morning trade in Asia July 6 on fears that oil demand will soon outstrip supply after the OPEC+ coalition, consisting of OPEC members and other oil producers, cancelled its July 5 meeting without ratifying an increase in production for August onward.
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At 11:16 am Singapore time (0316 GMT), the ICE September Brent futures contract was up 25 cents/b (0.32%) from the previous close at $77.41/b, while the NYMEX August light sweet crude contract was up 30 cents/b (4%) at $76.64/b. The ICE Brent marker had settled 1.30% higher July 5 at $77.16/b, the highest on record since Oct. 29, 2018.
The rise in the international oil markers come after OPEC+ called off their July 5 meeting, which was to mark the third day of official talks, necessitated by the coalition’s failure to reach an agreement to ease production cuts from August onwards.
The producer group has reached a tentative agreement to boost collective crude output by 400,000 b/d each month from August to December, but Saudi Arabia wanted to tie the production increases to lengthening the supply management pact through the end of 2022 from the current April 2022 expiry.
The UAE, however, refused to sign off on the extension, insisting that its baseline production level from which its quota is determined be raised first.
The UAE’s baseline under the current pact, determined by its October 2018 production level, is 3.168 million b/d, but it now claims a capacity closer to 4 million b/d. UAE officials have also highlighted that the country has about 35% of its capacity shut, compared with an average 22% for other members.
Since all OPEC+ decisions must be unanimous, UAE’s refusal to sign off on the extension, and by association the production plan, means that the alliance will rely on the fallback agreement, which calls for output quotas to remain flat at July levels. The coalition is withholding 5.8 million b/d of output as of July.
Analysts say that this would lead to an undersupplied market, with oil demand expected to rise as countries around the world emerge from pandemic-related lockdowns. S&P Global Platts Analytics forecasts global oil demand could rise 8.8 million b/d from June to December.
“[OPEC+ sticking to current production limits] will see the market tighten even further as demand surges amid easing travel restrictions over the summer holiday period,” ANZ analysts said in a July 6 note.
ANZ analysts also said the failure to ratify the production rise may “undermine the unity among the OPEC+ alliance”, a point which was also brought up by Mazhar Muhammed Salih, an adviser to Iraqi Prime Minister Mustafa al-Kadhimi.
“In the absence of coordination and understandings between the members of OPEC, the beginnings of a price war will be formed again,” he told the state-run Iraqi News Agency.
Nevertheless, Platts Analytics remains optimistic that a resolution will be reached, as delegates said members were still holding backchannel consultations to try and broker a deal between Saudi Arabia and the UAE.
“Saudi Arabia and the UAE maintain a mutually beneficial interest in preserving OPEC+ cohesion and balancing oil markets, which combined with a geopolitical alliance in the Middle East makes a near-term compromise a plausible outcome,” Paul Sheldon, chief geopolitical adviser at Platts Analytics, said in a note published July 5.