Oil has hit the ground running. Crude oil has observed a remarkable run so far in 2021 with March the only bearish month in an otherwise bullish year. The spot price of crude oil traded at $48.40 per barrel at the beginning of the year. With each successive month thereafter, prices surged and the seven-year high value of $76.97 per barrel was achieved on July 6. An astounding jump of 59% was observed from its opening price in 2021. The last time such a level was witnessed was in November 2014. Although the markets have corrected since the run, the prices have reclined in a bullish range.
Oil prices rose to their highest since 2014 after opposition from the UAE delegates thwarted a Saudi Arabia-Russia proposal for a gradual increase in production by the largest exporters in the world. This impasse indicates that the OPEC+ bloc will hold production at current levels in August despite the increasing demand from a global economy recovering from the pandemic. On the other hand, the higher prices also drive the risk that each individual country may break the agreement and raise the output inflicting another price war.
When OPEC Secretary General, Mohammad Sanusi Barkindo said, “The 18th OPEC and non-OPEC Ministerial Meeting has been called off!” in a letter to the heads of delegation of OPEC member nations and non-OPEC producing nations participating in a Declaration of Cooperation (DoC), the prices rallied to the current levels. He further stated that “Upon consultations with Prince Abdul Aziz Bin Salman, Minister of Energy of the Kingdom of Saudi Arabia, and Alexander Valentinovich Novak, Deputy Prime Minister of the Russian Federation, Chairman and Co-chairman of the OPEC and Non-OPEC Ministerial Meeting, the reconvened 18th OPEC and Non-OPEC Ministerial Meeting has been called off. The date of the next meeting will be decided in due course and we will inform you accordingly.”
As per media and analysts opinion, OPEC and its members had suddenly called off their July 5 meeting after a series of mediation efforts failed to resolve the rising disagreement among members. Market pundits had opined that this will inevitably raise the risks that producer groups could corner the market into a supply squeeze or create a price war if the coalition collapses.
The standoff reached in the last meeting was finally overturned and the 19th OPEC and Non-OPEC Ministerial Meeting held via video conference was concluded on July 18. In a press release published on the OPEC website, delegates noted that the ongoing improvement of the market fundamentals and the rising oil demand corroborated the fact that global economic recovery has been highlighted in most parts of the world with the assistance of accelerating vaccination programs.
Keeping in mind the current oil market fundamentals and the consensus on its outlook, members decided to adjust upward their overall production by 0.4 million barrels per day (mbd) starting August 2021 until phasing out the 5.8 mbd production adjustment. Members also concluded that the oil market developments will be assessed in December 2021 coupled with the participating countries performance. Members will also continue to comply with the mechanism to hold monthly OPEC and Non-OPEC Ministerial Meetings for the entire duration of the DoC to identify and assess market conditions and agree on production level adjustments for the following months. Members have decided to hold the next meeting on September 1. The effect of the decision was observed in the oil markets with crude oil correcting $6 in a day to slump to the lowest price of $65.59 per barrel.
The Way Forward
The breakdown in talks to enhance crude oil production among OPEC members and their allies had introduced a new factor into an already challenging global environment for incumbent traders. However, the successful conclusion in the very next meeting reaffirmed the belief that the markets can breathe easy for the time being.
Market analysts opine that OPEC and its allies are expected to take measured steps before increasing production from the current levels. Statistically, around 40% of the production cuts introduced in 2020 have been restored and the group was under immense pressure from economies including India to increase supply as the global economy demands more oil.
Markets are set to test the psychological level of $80 per barrel in the near future and if this level is breached then we may be looking at the next target of $100 per barrel, a level not witnessed since July 2014.