Problems within OPEC have led to them rescheduling their important meeting on production cuts. Will these issues lead to another oil oversupply and fall in prices?
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Originally the meetings were meant to take place on Monday and Tuesday, Monday was for OPEC to come to an agreement before discussing it on Tuesday with allies like Russia to get an overall agreement. However, already on Monday there were disagreements, so they’ve now delayed the second stage in the meeting until Thursday to give more time to come to an agreement.
The issue seems to be the divide between OPEC members, in fact even before the meeting Iran’s oil minister had said he didn’t expect talks to go smoothly since there is a split between some of the biggest producers.
On one side you have Saudi Arabia who are very much in favour of extending the production cuts, but on the other side you have the UAE who are making demands. Earlier in the year, the UAE had produced more oil than its allocated quota, and so they cut more barrels from its quota after that to make up for the extra output they had produced before.
Now they are saying they don’t want to agree on an extension unless other countries that overproduced also do the same as they did and make extra cuts to make up for the extra output they produced.
Saudi Arabia aren’t happy about this and their energy minister was even so frustrated that he threatened to resign as co-chair of the committee that oversees the output deal.
Saudi Arabia think the demands are unreasonable, since OPEC’s compliance with cuts has been historically high in recent years, so they don’t want to go off track.
And all of this is happening before it’s even got to the point of being discussed with Russia, and we can expect things to not be so straightforward there either.
Things are quite complex right now. Although the vaccine is positive news, there are still risks that could cause delays with that and even then there’s no guarantee travel or other energy-heavy industries will bounce back straight away. Even the simple fact that the OPEC meeting is being held virtually rather than in Vienna where it’s normally held, should be a clear sign that the global economy isn’t ready for higher oil production just yet.
But actually the global recovery is quite uneven at the moment and that’s a big issue. Different locations are recovering quicker than others, such as Asian countries bouncing back while Europe has been in lockdown. And there’s also an uneven recovery in terms of the type of oil that’s being demanded right now.
So there are all kinds of complexities affecting producers, but OPEC only has one broad tool they can use, which is to either cut production or increase it. That’s a difficult thing to agree.
We can see in oil markets that there’s backwardation, meaning demand is running above supply. And if you want to know more about that, click up here for a video on oil markets we released earlier in the year explaining how they work.
But the thing is, even if demand is increasing, OPEC aren’t wanting to just balance supply and demand, they’re going to want to run at a deficit for a while where there’s more demand than new production, so they can clear some of the oversupply from earlier in the year. So increasing production isn’t going to allow that deficit to happen.