OPEC+ Discussions Spill Over to Conditionalities

Oil prices have sustained above the US$ 75 per barrel mark and it seems to be poised to touch the US$ 80 level at this juncture. While the view that it may moderate is based on two factors, that there will be an Iran nuclear deal between the US and Iran, and that may bring some supplies into the market. This has not materialised as yet, as some factors point towards a hardening of the US-Iran relations contrary to the thawing of the freeze witnessed for many years now. Second, there is a call from OPEC + for increasing supply by 400,000 barrels per day. There is agreement on enhancing the supply form August with agreement among the bigger suppliers like Saudi Arabia and Russia. But there seems to be some disagreement within the OPEC + on this. UAE has said that supply needs to be enhanced right away without any conditions as there is unused inventory which producers built up over the last two years. This pool of unsold stock is the result of the slump in demand due to the pandemic and its adverse impact on
travel related demand. The OPEC+ condition that the agreement among the countries entered into a the time of the slump in prices last year should be continued till the end of 2022 has been objected to by UAE. UAE is of the strong view that the agreement may now be abandoned as conditions have changed. There are discussions between UAE and the rest of OPEC + to resolve this issue.

There is a strong rise in demand for oil and gas in the US with people moving out and getting on to the highways for holiday destinations. This surge in demand may be restricted to the current season, but thegeneral increase in demand due to the post-pandemic pick up in travel also is a noticeable feature affecting the prices. The US crude inventory has been coming down and it is at a multi-year low. The decline in the US crude oil inventories including the strategic petroleum reserves has been to the tune of almost 1 million barrels per day, and this trend is visible in the last three to four weeks consistently. Naturally, these factors would add to the price pressures. Against the background of the surge in demand for oil, the prices are likely to remain elevated even with a gradual rise in OPEC + supply over the next two quarters. While the target still remains US$ 80, any extra supply coming into the markets from OPEC+, or others, or a marked strength in the US Dollar, may pull it back to the US$ 70/72 levels.

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