American credit rating agency, Fitch Ratings has stated that the OPEC+ has delayed its decision on the extent of crude oil production increases, raising concerns about the alliance’s ability to coordinate production and underlining disagreements about supply policies.
Earlier this week, OPEC+ postponed for the third time its meeting in order to finalize the decision on the next phase of production raises and each nation’s production quota. Saudi Arabia, Russia, and the UAE are said to be struggling to reach a compromise.
The oil prices have risen to their highest levels in three years due to an increasing oil deficit, which currently estimate at slightly more than 1 million barrels per day (mmb/d). “Oil supply is constrained by the previous alliance output decision, while crude oil demand is growing as the global economy recovers from pandemic-related shocks,” according to the reports.
While Saudi Arabia, Russia, and the UAE have offered to raise the alliance’s production by 0.4 mmb/d each month from August to December, the UAE also demands to increase its baseline production (a starting point from which its cuts and increases are calculated) from April 2022 to account for its larger production capacity following investment.
The country’s capacity is expected to expand to 5 mmb/d from 4 mmb/d by 2030 based on its investment plans. However, the country has an OPEC+ production quota of just over 2.7 mmb/d in July.
The gridlock tests the alliance’s ability and effectiveness to coordinate output decisions. In addition to the UAE, some other countries in the alliance, such as Iraq, Kuwait, and Russia, are exploring investments to boost production capacity. Allowing one country to increase its baseline capacity could lead to similar demands from other members, jeopardizing crude supply management efforts.
The credit rating agency said, “Although the price increases benefit crude oil producers, they are not driven by a structural deficit as about 6 mmb/d of production capacity has been removed from the market by OPEC+ and could easily be returned. We ultimately expect OPEC+ to agree on production increases.”
“In addition, Iran could add about 1.5 mmb/d of supplies if US sanctions are lifted. Given the recovery of the global economy and mobility, the increased supply should mostly be absorbed by higher demand leading to a continued rundown in inventories this year,” the agency added.
OPEC+ output policies have been the key driving force behind the oil price recovery in 2020-2021, after a severe drop in demand in March 2020 and a short period of unilateral decisions on production volumes taken by major alliance members. Even though oil demand has been recovering, new coronavirus variants pose a threat to this recovery, making quick output decisions critical to avoid a sudden price hike.
