OPEC+ crisis: Oil shoots to 6-yr high. What to expect?

Summary

  • Oil prices in the US reached a six-year high following the failure of the OPEC meeting.
  • The UAE refused to increase oil production to 400,000 barrels a day as proposed by OPEC.
  • Oil demand in the US will rise to that of pre-pandemic era, but supply looks uncertain.

Oil prices in the US surged to six years high following the failure of the OPEC countries to decide on how much oil to be produced. US benchmark West Texas Intermediate hit a six-year high to US$76.98 a barrel this week, and global benchmark Brent surged to three years high to US$77.84 after the meeting of the Organization of Petroleum Exporting Countries (OPEC) was postponed.

The US crude oil prices went up by 60% this year due to various factors. Drivers are back on the road after widespread vaccination and recovery of the US economy following the pandemic. Oil prices jumped to record levels over the weekend and the US Independence Day holiday. Investors also played a big role in the surge in oil prices as they heavily invested in oil and gas companies' stocks.

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Source: Pixabay

Although oil demand is set rise to a pre-pandemic level, OPEC's failure to reach a consensus over increasing production means no increase in oil production. Thus the supply of oil will be limited. However, some OPEC+ are hopeful that the meeting would take place soon and supply would go up.

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Russia-led OPEC continues to hold millions of barrels of oil, limiting its supply. Higher prices might cause inflation and slow recovery post-Covid-19 for energy-dependent countries. India, the world’s third-largest oil consumer, may see inflation rising further due to higher oil prices.

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What is the OPEC+ crisis?

OPEC+ or energy alliance on July 2 proposed to increase oil production by 400000 barrels a day from August till year-end. And thus, adding 2 million barrels a day is a 2 percent increase over pre-pandemic demand. However, United Arab Emirates refused the proposal. As a result, the meeting had to be called off, and no date for the next meeting is fixed.

UAE said that it wants a better deal. It is ready to increase production this year but wants a better deal in 2022. And Saudi Arabia asked for compromise and rationality to arrive at the consensus.

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The UAE has invested billions in increasing its oil production capacity and wants a better return. It says that the existing baseline to calculate oil production is outdated and does not consider its new capacity. That means cutting down supply than other members.

If UAE’s request is accepted, then OPEC has to do it for all its members. However, Russia is not part of OPEC but has been a constant ally since 2016. So it might have to cut down production under the new formula.

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UAE and Saudi Arabia used to be great allies. But their views are changed due to various issues like the relationship with Israel and Qatar, the Yemen war, and competition between both to become business and tourist hubs of the region. 

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