OPEC+ Breakdown: What to Watch as the Oil Crisis Evolves
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OPEC+ infighting has deprived the oil market of extra supply and sent crude surging to a six-year high in New York.
It鈥檚 too early to tell whether the breakdown of the cartel鈥檚 meeting on July 5 could escalate into a conflict between Saudi Arabia and the United Arab Emirates as bitter and destructive as last year鈥檚 price war.
Here are some key events that could determine the course of the crisis in the coming days:
Price Moves
Middle Eastern producers have traditionally signaled their intention to sell larger or smaller volumes of crude through their monthly pricing. Raising the cost indicates less oil, while cutting the price of barrels typically spurs buyers to ask for more.
Saudi Arabia raised its official August selling prices for crude in its main market of Asia on July 6. That suggests the kingdom expects the balance between supply and demand to be tighter, as you would expect if OPEC+ members can鈥檛 salvage their deal and output next month is maintained at current levels.
The UAE鈥檚 hands are tied on pricing because the cost of its flagship Murban crude is set by trading on an exchange that started this year. One barrel of Murban will cost $72.34 in August.
Open Taps
Existing OPEC+ production limits remain in place 鈥 as long as members of the group continue to respect them. If Saudi Arabia or the UAE decided to break free of their quotas and open the taps, they could each add at least 1 million barrels a day to the market, potentially driving down prices.
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The increase in Saudi Arabia鈥檚 official August selling prices suggest the kingdom isn鈥檛 contemplating such a bold move. Another signal will come in a few days, when the kingdom tells its customers how much crude they will be getting next month.
Abu Dhabi already told buyers before the OPEC+ meeting that they鈥檒l be getting less Murban crude than they asked for in August.
External Pressure
Former U.S. President Donald Trump played a big part in ending last year鈥檚 price war between Saudi Arabia and Russia. He publicly cajoled the two countries back to the negotiating table and helped to unblock talks when Mexico objected to the terms of the deal.
The current occupant of the Oval Office has taken a more traditional approach than Trump鈥檚 direct intervention, but was nonetheless quick to show the cartel that he is watching events closely. The administration of President Joe Biden has 鈥渂een engaged with relevant capitals to urge a compromise solution that will allow proposed production increases to move forward,鈥 a spokesperson said July 5.
With U.S. oil futures jumping to a six-year high just below $77 a barrel on July 6, watch out for further signs of American pressure for OPEC+ to get its act together.
Quiet Diplomacy
Other members of the OPEC+ coalition haven鈥檛 given up on a deal. Iraq鈥檚 Oil Minister Ihsan Abdul Jabbar said on July 5 that he hopes to 鈥渨itness a date鈥 within the next 10 days for another meeting. The group should still be able to find a deal that satisfies everyone, he said.
The country with the greatest incentive to bring its allies back to the table is also one of the most powerful members of the coalition 鈥 Russia. Its companies are keen to boost output in August, but need several weeks notice to do so. Rising domestic gasoline prices are an issue of growing importance before the parliamentary elections in September.
Moscow鈥檚 failure to secure its desired production increase was a rare setback for Deputy Prime Minister Alexander Novak, one of the original architects of the OPEC+ alliance. He made no comment after the cancellation of the July 5 meeting, so watch for any signals that he is still working to salvage something.
Air War
The split between Saudi Arabia and the UAE has been unusually personal and public. Previous disputes between the countries were resolved behind closed doors, but this time around their energy ministers were communicating through rival TV interviews.
If the rift continues to play out in full view of the world, that could be a sign of further escalation.
For Neil Quilliam, association fellow with the Middle East and North Africa program at Chatham House, 鈥渨e can expect things to get worse before they better. And that means the UAE raising the specter of leaving OPEC unless its minimum requirements are met.鈥
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