Oil has climbed to its highest level in three years on Tuesday amid a dispute between Saudi Arabia and the United Arab Emirates that has blocked moves to increase OPEC + supply [como se le conoce en la jerga del sector a la OPEP ampliada, que incluye a Rusia y a otros países de Eurasia]. The barrel of brent, the benchmark in Europe, has exceeded $ 77, the highest since 2018, while the US West Texas is close to that level and is at prices that were not seen since November 2014.
After several days of tense negotiations, the failure of the Organization of the Petroleum Exporting Countries and its allies leaves the market without the additional supplies it had for next month. And it puts the stability of the global economic recovery at risk at a time of inflationary pressure. If not corrected in time, its effect on energy prices threatens to hit consumers, and can derail the narrative of the Federal Reserve and the European Central Bank that the current inflation peak (5% in the US , 1.9% in the euro zone) is transitory, which would accelerate the withdrawal of stimuli.
Furthermore, the frictions, unleashed by the demand of the Arab Emirates to expand its production quota, question the ability of the alliance to control the operation of the oil market. The next few days will be decisive to know if the confrontation leads to a conflict as destructive as last year’s price war, or on the contrary the waters return to their course. For Norbert Rücker, an analyst at the Swiss bank Julius Baer, the cohesion of oil exporters is fragile, but he believes that it is a one-off crisis brewing in dispatches, and therefore reversible. “Oil prices could rise in the short term, but they should decline in the long term. The offer is scarce for political reasons, not structural ”. An eventual return to the Iranian oil markets may also play in favor of this theory, pending a possible lifting of the sanctions imposed against it by the United States, something that ING analysts see as possible at the end of this year. .
Both the international big oil companies and the petro-states of the Middle East will be very attentive to the publication of prices and trading volumes for Riyadh and Abu Dhabi for the month of August. The fear that the conflict could get out of control has even led the United States to intervene to ask for an agreement. Other countries very dependent on the sale of crude oil have also spoken out. “We do not want a price war,” said Iraqi Oil Minister Ihsan Abdul Jabbar. “And we don’t want prices to rise above current levels,” he added.
The public rift between Saudi Arabia and the Arab Emirates, traditionally allies, has kept oil a coveted commodity on the market when many anticipated its decline. The upward cycle comes in the midst of global change towards non-polluting fuels, with the US and the EU undertaking large investments in clean energy, and even the big oil companies redirecting, voluntarily or forcibly, part of their funds towards renewable projects and companies. of large ships that transport it, postponing fleet renewals due to the uncertainty about the necessary capacity and the environmental requirements of their fleets.
Geopolitical tensions are behind the latest price shock, already driven in recent months by the economic reopening caused by the advance of the vaccination campaign. The last time Saudi Arabia and the United Arab Emirates clashed over oil policy, in December 2020, the latter even flirted with the idea of leaving the club. The dispute was followed by a truce, but in this case the break has been so abrupt that the group has not even set a date for their next meeting. The collapse of the talks overturns the expected increase in August production, and leaves the market without barrels just as the global economy enters the key phase of the recovery from the pandemic, especially in the EU, where the Twenty-seven are waiting for the barrage of community funds.
With prices above $ 75, oil increasingly becomes a burden, not only in oil-consuming emerging markets like India, but also for Western countries. For Giovanni Staunovo, commodities analyst at UBS, a barrel of crude may continue to climb in the near future. “With production already in deficit and an increase in supply lagging behind demand, it is likely that production constraints will drive prices up,” he says. In the medium term, however, he believes that there are other possibilities, such as the division having the opposite effect, by fostering fierce competition between producers to win market that leads them to pump more, although Staunovo believes that this is an unlikely scenario .
Meanwhile, the main importers are very aware of the failure of the agreement. The Administration of US President Joe Biden has urged the group to act together. And a spokesman for the White House has assured that they are “closely following the negotiations and their impact on the world economic recovery,” and are maintaining contacts to find a solution to increase production.
The expanded OPEC has already recovered some of the crude production it halted last year in the initial stages of the pandemic. The 23-nation coalition decided to inject about two million more barrels per day into the market between May and July, and the question before Monday’s meeting was whether that trend would continue in the coming months.
The cartel’s own data shows that oil inventories, which reached record levels not so long ago, have returned to average levels as the recovery in fuel consumption continues. According to OPEC Secretary General Mohammad Barkindo said last week, demand in the second half of the year will grow by five million barrels a day compared to the first six months of the year. The main driver of the opening of the taps is Russia, with its companies eager to increase production and gasoline prices rebounding, a delicate fact only months before the parliamentary elections in September. Moscow’s unsuccessful attempts to increase production have been a setback for Deputy Prime Minister Alexander Novak, one of the architects of the OPEC + alliance. Novak avoided comment after the suspension of the meeting on Monday, but everything indicates that he will work behind the scenes to find a solution.
Iraq’s Oil Minister said he expects a new date to be set in the next 10 days for another OPEC + meeting, a meeting where they should be able to smooth things over and reach an agreement that satisfies everyone. In the meantime, he hopes that members will continue to respect their current production quotas and that the impact on prices will be temporary.