Oil Rangebound as UAE Still Holds Out Against OPEC+ Deal

© Reuters.

By Geoffrey Smith

AiVIF.com -- Crude oil price drifted sideways in early trading in Europe on Monday, after a weekend of diplomacy conducted both in private and through broadcast media failed to break the deadlock over production policy among the world’s biggest exporters.

By 4:50 AM ET (0850 GMT), Brent Crude, the global benchmark, was up 0.3% at $76.38 a barrel, while U.S. crude futures were up 0.2% at $75.34 a barrel.

The United Arab Emirates continues to block a plan that has received broad support from the rest of the Organization of Petroleum Exporting Countries, under which their output would rise by 400,000 barrels a day every month until the end of the year. The plan also presupposes that the group sticks to its policy of regular reviews of output level beyond the April 2022 date currently agreed.

The UAE’s Energy Minister Suhail al-Mazrouei was reported by Argus Media over the weekend as saying that his country supports the proposal for the so-called OPEC+ group – which includes Russia and a handful of other non-OPEC exporters – to raise production from August, but cannot agree to  extending the current agreement until till the end of 2022, because of what it calls "outdated" production quotas.

The UAE has invested heavily in recent years in new and relatively low-cost production capacity which is currently idled.

However, the UAE’s insistence on a higher ‘baseline’ for its quota within OPEC’s overall output opens a can of worms, given that all members would like the revenue from a higher quota. Any concessions to the UAE would set an uncomfortable precedent for when Iran, currently exempted from the deal, is ultimately reintegrated into OPEC’s collective production policy.

"If everyone wants to increase production, then the agreement must be extended," Saudi Oil Minister Abdulaziz bin Salman told Alarabiya TV at the weekend.

OPEC+ has gradually raised its output this year as global demand has recovered from the pandemic, eating into inventories – especially in the U.S. – at an ever-faster rate. However, if it fails to agree on a production level beyond July, then the current quotas would remain in force, meaning that no extra supply would be restored to the global market, even though demand continues to rise.

It was such thinking that pushed crude prices to their highest in nearly three years last week.

Fresh economic data on Monday confirmed that the Chinese economy continued to grow in June, albeit at a more moderate rate. The Eurozone’s composite PMI, meanwhile, was revised up to a new record high of 59.5 as the continent reopened its economy further.

Prices also continue to be supported by record high natural gas prices in Europe, due to reduced supply from Russia and to increasingly strong demand for gas to substitute for coal. Prices for Carbon Emission certificates surged another 1.4% early Monday in London to a new record high.