Oil on a bullish momentum as OPEC+ policy rift drags on
The disagreements within OPEC+, that have been dragging policy negotiations since July 1, have added a serious spin of uncertainty for traders and prices are rising on the prospect of a no-deal that could strip the market of the extra barrels that it expects from the alliance from August.
Oil market tensions have not been this tense since the 6 March 2020 breakup, and the uncertainty is driving prices beyond 2-year highs in the near short term.
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The reason a no-deal is bullish for the market is that, unlike the previous breakup in March 2020, if OPEC+ members don’t agree on a new deal - they are still party to the original deal already in place which does not immediately cater for more output after July.
As balances stand at the moment and with a surge in summer oil demand, even rising output by as much as 500,000 barrels/day in August is bullish. So keeping OPEC+ production steady to July levels instead is ultra-bullish due to the undersupply that such a development would cause this summer.
The core of the OPEC+ rift is that the UAE is lobbying for more production, a demand Russia is quietly supporting on the sidelines and Saudi Arabia loudly opposing on the public arena.
If the UAE were to get leniency on its production quotas, it is likely other supply-enthusiastic countries such as Russia and Iraq would also be able to negotiate supply increases.
If UAE and more countries are allowed to up their production, the conservative stance that OPEC and Saudi Arabia aimed for is swept away from the table and prices will take a bearish hit.
For now, the group is at an impasse as the UAE continues to lobby for a higher production quota which, if granted, would likely also have to include the other supply hawk countries. A combined lift of quotas could result in an increase of more than the 500,000 b/d that the market originally speculated.
An initial August supply boost of more than 500,000 b/d from OPEC+ should theoretically help bring the market balance towards an equilibrium, but it could also be a premature step in light of the highly contagious Delta strain that is triggering countries in Asia to increase social distancing measures.
If an increase between 600,000 and 1,000,000 b/d in August starts being discussed, prices may take a moderate dip on the prospect.
A wildcard outcome of the OPEC+ meeting could include a scenario in which OPEC+ decides to bring in members like Libya and Iran, who are currently exempt from cuts, to also do their part and hold back a certain percentage of supply to keep the oil price in firm bullish territory.
Else, Libya again may be losing stable political ground after UN-backed talks, aimed at establishing a constitutional basis for presidential and parliamentary elections to be held in December 2021 broke down.
Political downside risk in Libya translates into positive upside risk for oil prices, as any disturbance in the country’s 1 million bpd of production would tighten the supply-demand balance.
Louise Dickson is Rystad Energy's oil markets analyst.
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