SINGAPORE (BLOOMBERG) – Brent oil held gains near US$76 a barrel ahead of another round of critical Opec+ talks to break a stalemate over raising production, with tension rising over the weekend between two long-time allies.
Negotiations are set to resume later on Monday after ending Friday without a deal to boost output due to demands from the United Arab Emirates for better terms for itself. The impasse has led to a rare diplomatic spat between Saudi Arabia and the UAE and leaves the market guessing how much oil it will get next month. Futures in London were steady after fluctuating earlier.
“It’s the whole group versus one country, which is sad to me but this is the reality,” Saudi Energy Minister, Prince Abdulaziz Salman, said in an interview with Bloomberg Television on Sunday night.
Brent crude jumped more than 8 per cent last month, capping a powerful first-half rally, aided by a steady demand recovery in key economies including the United States, Europe and China. That advance was also underpinned by Opec+ keeping a tight rein over supplies. Elevated energy prices are stoking worries about inflation, and the White House is already voicing concern about rising gasoline prices.
Most Opec+ members backed a proposal to increase output by 400,000 barrels a day each month from August, and push back the expiry of the broader supply deal into late next year. The UAE, however, is seeking to change the baseline that is used to calculate its quota, a move that could allow it to boost daily production an extra 700,000 barrels. It is also refusing to back an extension of the pact.
“The market is understandably nervous as unity among the Organisation of Petroleum Exporting Countries appears to be weakening,” said senior commodities strategist Daniel Hynes, from Australia and New Zealand Banking Group in Sydney.
“The market is tight. Even with a small increase from Opec+, we see inventories continuing to draw down in the second half of the year.”
With global daily oil demand set to increase by three million barrels from the May-June period to December, and little supply growth elsewhere, the proposed increase from Opec+ will likely keep the market in deficit, according to a note from Morgan Stanley.
That will support Brent prices within the bank’s forecast range of US$75 to US$80 a barrel in the second half of this year.
A failure by the cartel to agree to raise production may further squeeze the market, while a breakdown in their unity could result in a free-for-all that crashes prices – just as it did during a price war between the allies last year.
With the UAE refusing to give any ground, the prospect of a no-deal outcome as well as an exit from OPEC “has risen materially even if it has not yet fully entered into firm base-case territory,” according to RBC Capital Markets. The prospect of $100-a-barrel oil is so politically unpalatable that US officials may appeal to prevent a virtual fireworks display on Monday, the bank said.