In line with Monolith’s view, OPEC+ members have agreed to a compromise and will now raise production from August and extend the curtailment deal to the close of 2022. In early July’s monthly meeting, the UAE refused to agree to increased production in August and an extension of the current deal without an increase in its baseline production levels which are used to calculate production targets. The impasse led to heightened market uncertainty with tight markets failing to support prices as the specter of a deal collapse and price war became an outside risk, albeit very unlikely. The concessions the UAE were seeking have now been met with an increase to their baseline of 332,000b/d starting in May 2022. In a move to prevent further dissent, the group also agreed to baseline changes for key members Saudi Arabia, Russia, Iraq and Kuwait.
The details of the compromise agreement also give a clearer indication of timing and manner in which OPEC intends to eventually conclude the agreement. Based on OPEC’s press release the group will target monthly increases of 400,000b/d starting August 2021 which should see the bulk of the current 5.765mnb/d of production returned to market by the end of September 2022. However, the deal is set to expire at the end of December 2022 giving the group scope to delay monthly increases should market conditions turn unfavorable for supply increases.
Outlook & Implications
The new compromise agreement has removed some of the uncertainties in supply for the next 18 months and more importantly the near-term price pressures due to tight supply. The additional production in the coming months will help ease upward price pressures bringing supply and demand in better balance. Although the new output is not expected to completely ease the tight market conditions it will help remove some of the bullish froth. In addition, the extension of the deal along with the reconciliation of OPEC+ members bode well for continued market management and will serve to limit price volatility as OPEC have once again shown their ability to compromise. This latest agreement will see markets remain under the watchful eye of OPEC+ members until the close of 2022 and will likely see further supply additions should markets continue to recover as we expect. However, should global conditions deteriorate significantly OPEC+ will be severely tested if markets warrant a return of production cuts.
The increase of baseline production figures for Kuwait, Iraq and Russia have likely decreased the likelihood of further changes or disruptions to the agreement. In a pre-emptive move, the decision to increase baselines for these members will see little chance of them raising the issue in the future and thus threatening the collapse of the deal. We do not expect baseline production levels of the group as a continuing source friction or threat to the agreement given that all the major producers were given increases in output. The key issues going forward will return to individual compliance with targets and we expect OPEC+ to closely follow the plan set out at today’s oil prices. However, should oil prices change substantially we could see a production free-for-all unless OPEC+ takes on strategy to counter the change in market conditions. Although, the agreement will lead to greater oil supplied to the markets for the remainder of 2021 we still see prices remaining strong over the coming quarters as return of oil consumption remains on track despite the surging infections in key markets.