As the global economy recovers from the Covid pandemic fueling oil prices, OPEC+ countries, including Saudi Arabia and Russia, reached a deal via videoconference on July 18 to phase out 5.8 million barrels per day of oil production cuts by September 2022, agreeing to a request from the United Arab Emirates (UAE) that had jeopardized the plan.
“The revised OPEC+ deal is very favourable for Russia. Moscow will be happy,” Chris Weafer, co-founder of Macro Advisory in Moscow, told New Europe on July 22.
Firstly, it not only allowed the UAE to raise its baseline quote but both Saudi Arabia and Russia were able to also raise their respective baselines by 500,000 barrels each, Weafer said, explaining that Russia can now achieve its full pre-deal production in early 2020 or six months ahead of the previous schedule. “The deal favours Saudi, Russia and the UAE and is at the expense of other OPEC+ states, although many of them do not have the capacity to raise production,” Weafer said.
Secondly, according to the Macro-Advisory expert, the deal preserves the OPEC+ structure and gives a clear signal to the oil market that OPEC+ will continue to manage output to achieve an acceptable price average for the member states. “In other words, there will be no free-for-all production that would have endangered the price. It also makes clear that the group can adjust to whatever changes may occur to market conditions, e.g., if demand growth were to stall or reverse, and that should help reduce oil price volatility and speculation,” Weafer said.
Thirdly, Moscow did not have to take sides in what was essentially a neighbourhood dispute between two ambitious states and their equally ambitious Crown Princes. “Undoubtedly Moscow was active in the dispute resolution efforts behind closed doors but managed to preserve its preferred role of neutrality in the region,” he explained.
“In terms of the oil price, this deal probably means that we will not see $100 oil this autumn or winter. The extra oil should prevent a supply squeeze assuming the current covid wave soes not lead to economic disruption and weaker oil demand,” Weafer said, noting there is still a realistic prospect of Brent trading close to $80 per barrel coming up to year end and moving ahead of that in 2022.
Weafer said that scenario will depend on what happens to the pandemic and how forecasters view the global outlook for 2022 and 2023. At least, after this deal, OPEC+ still retains the mechanism to react in a way that will favour the member states.
At the meeting on July 18, OPEC+ noted the ongoing strengthening of market fundamentals, with oil demand showing clear signs of improvement and OECD stocks falling, as the economic recovery continued in most parts of the world with the help of accelerating vaccination programmes. The meeting decided to hold the 20th OPEC and non-OPEC Ministerial Meeting on September 1.