Breakdown of oil output talks threatens OPEC+ unity, may trigger weaker oil prices, says strategist

The collapse of talks between OPEC and its allies highlights the risks of the group’s unity breaking down and renews concerns about a possible oversupply of oil, a commodity strategist told CNBC. 

The energy alliance, referred to as OPEC+, was set to resume talks Monday, but discussions have been called off indefinitely. That comes after the group twice failed to reach a key deal on their oil output policy last week.

The group had sought to increase supply by 400,000 barrels per day from August to December 2021 and proposed extending the duration of cuts until the end of 2022. Last year, to cope with lower demand as Covid hit, OPEC+ agreed to curb output by almost 10 million barrels per day from May 2020 to the end of April 2022. 

The United Arab Emirates had indicated that, while it was supportive of the proposal to increase supply, it objected to the terms of the extension, which it said should be conditional on increasing its so-called baseline, which determines how much oil a country is allowed to pump. 

“I certainly think there are some risks that the market may be really sort of discounting at the moment and that is a breakdown of that unity,” Daniel Hynes, senior commodity strategist at ANZ, told CNBC on Tuesday.

“That has been I think by far the biggest advantage of this alliance over the past 18 months … the picture that it presents to the market around a coordinated and very compliant agreement which hasn’t really seen any producers expand outside of that,” he added.

But now the risks are rising from that conflict surrounding the baseline number, which production cuts or increases are measured against. The UAE now wants that baseline to be increased so it can produce more.

It has argued that it was not alone, as Azerbaijan, Kuwait, Kazakhstan and Nigeria also requested and got new baselines approved since the deal started last year, Reuters reported, citing an OPEC+ source.

Hynes said that the UAE now wanting that “side agreement” to increase their output is representing “a risk now to that unity, to that front.”

“I think that brings risks to oversupply in particular over the medium term,” he said.

Hynes doesn’t rule out weaker prices ahead, but said he doesn’t think there will be a price war.

“I think that would obviously be at risk if we started to see producers really push their own agenda and in a sense, go outside of that supply agreement,” he told CNBC. 

“But you know it’s all about perception and I think if the market does perceive that they won’t adhere to those current quotas, then clearly, they’re going to assume the worst and that would see weak oil prices ultimately,” he added.

Oil prices had surged to their highest levels in nearly three years on Monday, after the talks were postponed indefinitely. 

On Tuesday morning during Asia hours, prices rose further. U.S. crude was at $76.63 per barrel and Brent was at $77.45 per barrel.