Saudi Arabia and Russia are working towards a deal to cautiously release more barrels into the oil market, with prices having climbed to the highest level in almost three years, but officials have failed to agree on supply policy and delayed a decision until Friday.
Opec and its partners outside of the cartel met virtually for preliminary gatherings on Thursday to discuss gradual monthly production increases of several hundred thousand barrels a day between August and December.
But they were unable to reach a deal on production levels, postponing an official meeting of the so-called Opec+ group until Friday afternoon. The UAE has emerged as a roadblock, having raised concerns about its individual output quota.
People familiar with the talks said that Opec and its allies were considering one proposal for a production increase of 400,000 b/d each month, which is less than the 500,000 b/d initially proposed in recent weeks and months. They were also discussing extending the length of the deal into late 2022.
But the UAE has argued that the original supply curbs deal that was agreed at the height of the pandemic last year underestimated the country’s maximum production capabilities.
“The UAE has increased its production capacity so it’s understandable that they are pushing for a higher output target under any revised deal,” said Amrita Sen at Energy Aspects, an energy consultancy that advises many Opec members.
“It may seem a relatively minor point but we’ve seen these debates come close to derailing Opec agreements before.”
Traders and analysts were already sceptical that the volumes under discussion will be enough to halt a near-50 per cent rally in oil since the start of the year, with demand rebounding sharply from the depths of the pandemic.
Failing to agree a deal on higher output levels could mean the current level of cuts is maintained, probably spurring prices higher as consumption recovers, tightening the market.
Saudi Arabia is seeking to raise production cautiously as it attempts to balance stronger demand with persistent uncertainties caused by the Covid-19 crisis and new variants of the virus.
People close to the kingdom said its strongest motivation was that it did not want to see prices fall and would prefer them to be marginally higher, not just to provide the country with greater revenues from oil sales but also because it believed that more investment in the energy industry was needed.
Russia, which has pushed to maintain its market share, has for months lobbied for more aggressive increases.
“Maintaining price stability at high levels, while at the same time increasing its output, could be in the best interest of Opec+,” said Louise Dickson at Rystad Energy, a consultancy.
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Brent crude, the international oil benchmark, extended its gains on Thursday, with the price rising more than 2.4 per cent to above $76 a barrel, close to the highest level since 2018. Prices eased to $75.61 later in the day. West Texas Intermediate, the US benchmark, reached $75 a barrel for the first time in almost three years.
Investment in the sector has dropped sharply in recent years, and traders and analysts are increasingly warning that could lead to prices jumping above $100 a barrel if supplies look likely to fall short in the coming years — a price level Saudi Arabia fears would ultimately prove damaging for its interests because it would accelerate the move away from oil.
“Saudi Arabia believes that without greater investment in oil production globally there is a danger of prices ultimately overshooting,” said Christyan Malek, head of oil and gas at JPMorgan.
“By allowing oil prices to run higher today they avoid an oil price spike in the future led by the current paralysis in investment.”
Even though Opec delegates forecast stronger oil consumption in the latter half of 2021, they are worried about the trajectory of the virus, said Diamantino Azevedo, Angola’s petroleum minister, as the meeting of ministers began on Thursday.
Opec expected a “strong rebound of oil demand in the second half of the year”, Azevedo said. But he conceded that the virus was still taking a “painful toll” with “thousands of lives still being lost every day”.
Concerns about new variants mean that ministers are considering keeping curbs on supplies in place beyond April 2022, when the original deal to reduce production, agreed at the height of the pandemic last year, was due to end.
The Opec+ group agreed in April 2020 to cut output by nearly 10m b/d, or roughly 10 per cent of global demand, as widespread lockdowns and travel bans slashed oil consumption. The group has already begun to phase out the curbs, with current restrictions at just under 6m b/d.
“As shutdowns end in the largest consumer nations, such as the US and China, demand is returning to more normal levels each quarter,” said Ann-Louise Hittle at energy consultancy Wood Mackenzie.