OPEC+ Reached the Reopening Agreement Bloodlessly: What It Means for Oil Market

OPEC+ oil and energy ministers eventually fully backed the plan to increase oil production by 2 million bpd by the end of this year, and also extended the agreement beyond April 2022, when it expires. At the same time, from May 2022, for some member countries, the agreement will adjust the base level of production, at which oil production quotas are calculated. In particular, for Russia and Saudi Arabia it will be increased from 11 to 11.5 million bpd, for the UAE – from 3.17 to 3.5 million bpd – below the 3.8 million it initially demanded but above the previous baseline of 3.17 million, for Iraq – from 4.65 to 4.8 million bpd, for Kuwait – from 2.8 to 2.96 million bpd.

The unusually vocal dispute that jeopardized the unity of the cartel was resolved in a classic compromise – with Riyadh meeting Abu Dhabi halfway in its demand for a more generous output limit. So it was a major defeat of the rising skepticism concerning the cartel’s unity and longevity. The agreement means the cartel will boost output by 400,000 barrels a day each month from August, continuing until all of its halted output will have been brought back to operations.

In early July, OPEC+ ministers could not agree on these two issues for five days of almost uninterrupted talks. The UAE was not happy that the agreement on the oil production cuts is proposed to be extended after April 2022, when it expires, under the same conditions on which it is operating now. The UAE Ministry of Energy believed that the basic cut-off, from which production quotas are calculated, is not relevant for them and does not take into account real production capacities. Saudi Arabia, in its turn, at first rejected the option to adjust this parameter on an individual basis.

The spat was particularly bitter this time around, and the tensions went beyond oil diplomacy amid the growing economic rivalry between Abu Dhabi and Riyadh. Initially, all the OPEC+ members approved the restoration of oil production by 2 million bpd at an orderly pace until the end of this year, as the supply deficit in the market is increasing. But due to disagreements on the first round of talks, a vote on the quota easing was not reached.

The final communique says that the OPEC+ countries intend to increase oil production by 0.4 million bpd "until 5.8 million bpd are returned to the market," which is planned to be done by September 2022. However, in December 2021, this plan may be revised. The next OPEC+ meeting will take place on September 1, 2021. The multifaceted agreement means several things for the oil market. It gives consumers a clearer view of how quickly OPEC+ will restore the above mentioned 5.8 million barrels a day of production it’s still withholding.

Bottom line: in general, the very fact of the dispute resolution in an orderly manner is positive for the still highly volatile and uncertain oil market. However, the origin of this uncertainty doesn’t sit in the schedule of the oil production comeback, but rather in the messy worldwide post-Covid reopening. It would have been somewhat more expedient to link the base level to relevant forecast scenarios rather than to a strict timeline. However, since the door for a possibility of future adjustment remains open, this doesn’t look like a crucial issue for the oil price recovery, despite the current knee-jerk reaction driving oil prices lower during early European trade hours. Both Brent and U.S. WTI crude futures fell 2.2% to $71.63 a barrel and around $69.61 a barrel, respectively, offering interesting entry points.