Will the OPEC+ overcome baseline quota impasse amicably today?

 

OPEC+ dillema July 2021

Oil price that rose steeply on Thursday, started stumbling on Friday coinciding with the delay in the OPEC+ final outcome.

Although the members of the group put on a unified front, the sources close to the individual members cite disagreements among them as the cause for the delay.

It goes without saying the amount of pressure that the OPEC+ has been put under by the consumers over the rising oil prices; it’s not something that is happening in normal times; the world is still in the middle of the once-in-century pandemic – technically; the price of crude oil is an important cogwheel in the engine of global growth.

The members cannot afford to sweep the growing concerns of its customers under the carpet; nor can they let the price come down with a disproportional hike in the output. In these circumstances, in order to get the balance right, the policy makers of the cartel need the combination of Einsteinian wisdom and Gandhian patience.

It is already in the public domain that the key issue – if it’s the only one – is the reluctance of both Russia and Saudi Arabia to let the UAE increase its baseline from the current level of 3.2 million bpd to 3.8 million bpd – by 16%.

When the position of the UAE was interpreted by some of the media as the former being opposed to increase the production, it clarified that the UAE was not against an increase in production to control the price of crude oil; in short, it doesn’t want the world to confuse the two separate scenarios.

Although the members of the OPEC+ agree on production targets at regular intervals, the monitoring process has been a nightmare for its ‘policemen’ – and then reporting in public who the ‘naughty boys’ are.

The offenders usually get a slap on the wrist; they just compensate for it by production cuts - until next time, in most cases if not all.

Russia and Saudi Arabia, meanwhile, may agree on not revising the baseline for the UAE; they, however, have different views, when it comes to increasing the production of crude oil; Russia which has a much lower break-even cost for crude oil can make a hefty profit while cashing on the current oil price; Saudi Arabia is not in that position as the break-even cost for Saudi oil is much higher.

To make matters worse, all the members of the OPEC+ are aware of the existential threat by the US shale producers that could potentially exploit the chaos in the oil markets and make a swift comeback.  

In this context, the member of the OPEC+ will make yet another attempt to iron out their differences behind the closed doors to put on a unite front – until their next monthly meeting, of course.

 

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