OPEC+ squabble sends oil prices to 6-year high, threatening to dampen recovery and juice inflation
Oil prices are jumping to levels not seen in more than six years on Tuesday, after an OPEC+ deal to increase production as demand recovers fell apart over a rift between Saudi Arabia and the UAE.
Midmorning in London, the West Texas Intermediate contract was trading at $76.49, up 1.44% on the day, and at its highest level since November 2014. The benchmark Brent crude contract was $77.39 per barrel, up 0.30% on the day, its highest level since October 2018.
The surge comes after OPEC’s meeting was abandoned late Monday, largely owing to a mounting public split between Saudi Arabia and the UAE over the UAE’s production quota. The meeting was close to setting a new target for increasing production—the pandemic had prompted OPEC+ production cuts as demand fell—and if a new meeting can’t be arranged, production levels will remain steady.
In theory, that means supply will remain constrained even as global demand for oil continues to grow amid economic recovery from the pandemic. In June, the International Energy Agency estimated global oil demand would rise by 5.4 million barrels per day in 2021, and would reach pre-pandemic levels by the end of 2022.
It also implies—as we’re seeing on Tuesday—that oil prices have room to climb still further, exacerbating jitters over inflation as those costs are passed on to businesses and consumers. Oil is not the only commodity that’s on a tear: prices for fertilizers, metals, and basic agricultural products are also surging, threatening to dampen the recovery before it becomes widespread.
That prospect put even the U.S.—which is not a member of OPEC+—on the offensive.
“We are not a party to these talks, but administration officials have been engaged with relevant capitals to urge a compromise solution that will allow proposed production increases to move forward,” a Biden administration spokesperson told Reuters on Monday.
During the pandemic, as demand was crashing, the OPEC+ group of oil-producing countries agreed to production cuts of 10 million barrels per day. In the current meeting, OPEC+ countries were in the midst of agreeing to gradually push monthly collective supply up by 2 million barrels per day by December, while keeping the remaining cuts in place until the end of 2022. However, the meeting ended after UAE officials refused to agree to the deal unless their country’s baseline production limits were raised.
“The timing of this crisis is not too much of a surprise, as OPEC works best when faced with significant challenges, which are now unwinding as demand recovers,” said Alan Gelder, VP of refining, chemicals, and oil markets at Wood Mackenzie, in a note after the meeting ended.
However, some oil analysts warned that a deal could quickly be in the offing, which could produce a quick reversal in this week’s price surge.
“A no-deal that keeps output unchanged after July is not an outcome that any of the OPEC+ members want. The producing countries know it; the markets know it too,” said Rystad Energy oil analyst Louise Dickson in a comment. “And that’s what may be creating an expectation for a deal that may be satisfying the UAE a bit more, thus a less bullish outcome than previously thought.”
However, with observers watching a split between member countries—and plenty of behind-closed-doors negotiations, Dickson warned that for oil prices in the coming days, “it could be a wild price ride to either direction.”
The symbolism of prices rising to 2014 levels will not be lost on OPEC observers. That year marks a price war launched by Saudi Arabia to edge out market share taken by surging shale production in the U.S. In response, Saudi opened the taps, leading to a historic price fall that lingered for years.
There have also been other, high-profile fallouts between members: Last spring, a disagreement between Russia and Saudi Arabia over production cuts—just as the world was going into lockdown—contributed to oil prices dropping into deep negative territory.
Oil market analysts have already begun broaching the idea of $100 per barrel oil—a psychological level that would mark the return of an oil price heyday last seen in 2014. It’s also a benchmark which would make even high-cost production profitable once again, raising complex questions about rising oil supply in an already warming world.
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