OPEC+ meets for third day in bid to resolve UAE baseline production standoff

Quantum Commodity Intelligence – The July 1 OPEC+ meeting was framed as the most important of the year to date, but with Brent prices at $75 per barrel and Middle East benchmarks not far behind it should have been a pretty straightforward affair.

The OPEC+ alliance has largely been hailed a success as prices increased to $75 after hitting historical lows last year, and while the July meeting was not billed as a gathering of the victors with plenty of virtual backslapping, it was expected to be a harmonious affair with just the final details to sort out.

The run-up to the meeting followed the usual formula with familiar lines fed to reporters.

Russia saw room for sizeable production hikes, but Saudi Arabia and its Gulf allies urged a more cautious approach fearing supply increases could outpace the demand curve.

A modest hike of 500,000 barrels per day of additional output was largely priced-in for August, with similar monthly hikes until December set to add 2-2.5 million bpd by the year end.

As it was, the OPEC+ Joint Ministerial Monitoring Committee (JMMC) on July 1 recommended a 400,000 bpd increase each month until year-end, which was expected to be ratified the same day.

And for good measure, the OPEC+ Declaration of Cooperation (DOC) would be extended from April 2022 to December 2022.

Baseline

At that point, discussions got a whole lot more complicated; OPEC stalwart UAE would support the production increases and DOC extension if its baseline production figure could be revised upwards.

According to reports Friday, the UAE wants its baseline adjusted to April 2020 levels of around 3.8 million bpd, rather than the October 2018 production level of 3.168 million bpd.

"UAE has a solid case for a baseline increase. Problem is, some other countries would see their baselines decrease. So how do they get consensus," said Robin Mills, CEO of Dubai-based energy consultancy Qamar Energy.

Saudi Arabia and Russia were given baseline levels of 11 million bpd at the April 2020 OPEC+ meeting that agreed to slash production by 9.7 million bpd, while other producers were allocated baselines on October 2018 levels.

Saudi oil minister Prince Abdulaziz bin Salman said Sunday that Opec+ must extend its output deal to the end of April 2022.

"If everyone wants to increase production, then the agreement must be extended," the minister said in an interview with Saudi Arabia's semi-official Alarabiya TV.

Further talks on Friday failed to break the deadlock, so the meeting heads into a third day Monday, July 5.

"We've had impasses like this before and they've been resolved," Vitol's head of Asia, Mike Muller, told a webinar hosted by Gulf Intelligence Sunday, expecting the group to find a solution.

Meanwhile, the fallout means another day of price uncertainty for traders. While the 400,000 bpd cut from August was seen as broadly supportive, a potential spilt within the group may ultimately push more barrels onto the market if the group can't find an agreement.

September Brent was trading around $76/b late Friday, while August WTI was around $75/b.