OPECplus' Supply, Price Impact and Outlook

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Friday, August 06, 2021 / 08:31 AM / By FDC Ltd / Header Image Credit: FT


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The ongoing stalemate within the Organization of Petroleum Exporting Countries and its allies, known as OPEC+ has finally ended, as a compromise was reached with the United Arab Emirates (UAE) on its production level. The bone of contention was that the UAE wanted an increase in its quota, while Saudi was pushing for output curbs to be maintained until the rest of the year. The deadlock lasted for at least a week after the cartel's July 1 meeting, keeping the oil market and investors in limbo as to the way forward.

 

But all is well that ends well. The UAE's baseline for its oil quota would be increased to 3.8mbpd from 3.2mbpd, allowing the country to pump additional 600mbpd of oil. However, this deal is provisional and subject to the approval of all members at a yet-to-be-scheduled meeting. Increasing the UAE's quota/ baseline paves the way for extending the output curbs until December 2022.


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Impact on Prices

When the news broke out about the UAE deal, oil prices fell marginally then increased, trading in a choppy pattern. On July 15, oil price had lost over 1% in the early hours of the day, as investor concerns about a supply increase weighed on price. This was further compounded by OPEC+ announcement of a supply in-crease of 2mbpd. Add that to the growing spread of the Delta variant to more countries such as Nigeria and it ap-pears that the era of oil prices trading close to $80 and above may be over at least in the short term; especially as Iranian oil is yet to hit the market. Not to worry. Investors are optimistic that the ongoing global demand recovery is strong enough to offset the price moderating factors, keeping oil steady above $70pb.

 

This is good news for Nigeria who recorded a sharp plunge (50%) in its oil earnings in the first five months of 2021 on lower oil production. Barring any further disruptions (pipeline vandalism, force majeure), Nigeria's oil production level should start to pick up. This coupled with other upcoming sources of revenue such as the sale/ concession of about 36 idle state assets, should help put Nigeria in a better fiscal position.


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