Uncertainty has surged in the international oil market

In recent days, international oil prices once again become the focus of the market. Opec + talks again on how much to increase oil production. At a meeting of the coalition's Joint Ministerial Monitoring Committee (JMMC) in Vienna, Austria, on July 1, Saudi Arabia Russia proposed increasing oil production by 400,000 b/d per month between August December, extending the expiration of the agreement April to December next year.

However, after several days of tough negotiations, the UAE Saudi Arabia were unable to bridge their differences, explicitly opposing the extension of production cuts until the end of next year, the 18th Opec + ministerial meeting, which had been scheduled to reconvene on July 5, was cancelled, with Opec + failing to reach a consensus to increase production.

Saudi Arabia the UAE are at odds

This is the first time Opec + has cancelled a regular production cut. The Saudis have a point. Given the uncertainty surrounding a recovery in global oil demand, Saudi Arabia prefers to keep an appropriate amount of spare capacity to serve as a buffer in the event of emergencies.

In response to the Saudi proposal, the UAE wants to increase production but has agreed only to keep its current production curbs in place until Next April. The UNITED Arab Emirates "has sacrificed the most, with a third of its capacity sitting idle for two years," said Abdulaziz Al-Mazrouyi, the uae's energy minister. "We cannot reach a new agreement under the same conditions. We have the sovereign right to negotiate." If the UAE accepts the extension, it will have to raise benchmark oil production to 3.8 million barrels per day (BPD) the current 3.168 million BPD as part of a compromise.

The UAE's request for a higher benchmark output is in effect a lower cut, which Saudi Arabia rejected. Prince Abdulaziz, the Saudi energy minister, said in 34 years of attending Opec meetings he had never seen such a demand the UAE. He stressed, "We have worked very hard achieved very good results over the last 14 months, it would be a shame to maintain those results. Some compromise reason will save us."

It is clear that Saudi Arabia believes it should be cautious to increase production while demand for oil the economic recovery remain weak as COVID-19 has abated. Meeting the UAE's request to raise the benchmark level lower production cuts would be equivalent to agreeing to an increase of nearly 700,000 b/d. In order to balance the total increase, other countries would have to make up for it with higher cuts, which is clearly unfair. What's more, tempted by quick money, other members may follow the UAE's lead.

In just a few days, this round of Opec + meeting has been postponed again again. If the Saudi UAE delays in reaching a deal, it could mean that the market's expectations for an increase of 400,000 to 500,000 barrels are met Opec + will continue to pump at current levels, at least through August, creating a potential stalemate in the market.

The UAE is insisting on more production

Brent crude oil prices hit $77.09 a barrel for the first time in nearly three years on July 5, the highest level since 2018, according to CNBC data. WTI crude rose to a six-year high of $76.36 per barrel. It is no exaggeration to say that the dispute between the United Arab Emirates Saudi Arabia, following Russia Saudi Arabia's price war during the COVID-19 pandemic, has put Opec + into crisis again.

Opec +, at least superficially, creates an impression of unity. On December 3 last year, Opec + reached an agreement to increase production by 500,000 b/d in January next year. It will hold ministerial meetings every month to assess market conditions decide on the scale of output adjustment next month, with the monthly adjustment exceeding 500,000 b/d.

In early January, Opec + agreed on production for February March. On March 4, the group met again to maintain most of the production cuts until April, then decided to gradually increase production for the three months May to July, still capped at 500,000 barrels per day per month.

Saudi Arabia's insistence that it would sacrifice the interests of the whole for the sake of the UNITED Arab Emirates has exposed a deeper rift among Opec + members than previously thought.

So why did the UAE insist on a showdown with Saudi Arabia?

First, economic transformation needs financial support. In recent years, the UAE has adjusted its economic strategy spared no effort to diversify its economy build a competitive knowledge-based economy. Increasing oil sales revenue is undoubtedly of great significance in promoting industrial diversification.

Second, 30 per cent of capacity is idle. In 2020, the UAE announced plans to spend $122 billion over five years to increase its crude oil production capacity to 5 million barrels a day by 2030. However, under current Opec + quotas, about a third of uae capacity is idle. In response, Uae Energy Minister Ahmad Al-Mazroui called it "totally unfair unsustainable."

Sultan Jaber, chief executive of ABU Dhabi National Oil Company, said: "We are leaving anything to chance. We will continue our exploration programme, identify proven reserves increase overall production capacity."

Third, safeguard the interests of foreign equity investors. Unlike most Gulf Opec members, ABU Dhabi has large multinational companies, including BP Total, as equity investors, countries such as India are starting to get involved.

In an effort to boost production capacity maintain ties with Asian energy companies, The ABU Dhabi National Oil Company has also sold billions of dollars' worth of pipelines refineries to foreign private-equity investors. Clearly, a prolonged sustained lack of capacity hurts the interests of these multinationals affects the UAE economy.

Fourth, national interests are increasingly divided. The two larger Arab economies, Saudi Arabia the United Arab Emirates, though they see eye to eye on many issues, are increasingly competing with each other beyond oil policy, especially in recent years:

One is a change in attitude towards the Houthis. The UAE initially joined the Saudi-led war against The Houthis, but in June 2016, it announced it was ending its military cooperation with Saudi Arabia against the Houthis withdrawing all its forces Yemen. In October 2019, the UAE armed Forces issued a statement announcing that its troops stationed in Yemen's Aden province had returned to the UAE. The task of "maintaining security stability in Aden province" has been transferred to Yemeni Saudi forces on the ground.

Second, the policy towards Qatar is out of step. In 2017, the UAE, Saudi Arabia, Bahrain Egypt jointly boycotted Qatar imposed economic sanctions. In an effort to strengthen the anti-Iran Arab coalition, Saudi Arabia pushed for a deal to end its boycott of Qatar at a Gulf summit in January, but the UAE stressed that this would take time was unwilling to reconcile with Qatar;

Third, there are differences in policies towards Israel. The "full formal" peace agreement with Israel, brokered by America last August, was immediately followed by a cautious welcome to improved relations between Israel some Arab states.

These are intriguing signs of the UAE's intention to step out of Saudi Arabia's shadow pursue a more independent foreign policy on the international stage.

The National Development Reform Commission (NDRC) said on July 12 that the price of gasoline diesel in China will rise by 70 yuan 65 yuan per ton, respectively, 24 am on July 12, 2021, in line with the current mechanism for setting the price of refined oil products, based on the recent oil price changes in the international market. An employee fills up a vehicle at a gas station in Lianyun district, Lianyungang, Jiangsu province. (Xinhua Photo)

Uncertainty increases in global energy markets

The UAE ranks fourth among 23 producers in the Opec + cartel, behind Russia, Saudi Arabia Iraq. International oil prices rose after the collapse of the "Opec +" talks. Washington is concerned about international oil prices because of rising inflationary pressures. Oil prices could easily rise to $100 a barrel more after the Opec + talks fail, but they could also collapse, former U.S. Energy Secretary Michael Bluette warned.

On July 6, a White House spokesman said, "While the United States is a party to the talks, it is closely following the Opec + talks their impact on the post-pandemic global economic recovery. Administration officials have been in contact with governments to urge a compromise that would allow the proposed increase in production to proceed, which would be "conducive to affordable stable energy supplies".

America's concerns are misplaced. At present, the acceleration of global oil demand recovery has entered the confirmation period, the recovery of demand has exceeded the growth of supply side. The International Energy Agency (IEA) forecasts that global oil demand will reach 100.6 million barrels a day by the end of 2022.

So far, most investment banks have predicted that oil prices will continue to rise. Goldman sachs expects oil to hit $80 a barrel in the near term, a recovery in demand could push prices "well above" that level.

Bank of America expects Brent oil to return to $100 a barrel by next summer, the first time it has been in triple digits since 2014.

Morgan Stanley expects global oil demand to increase by 3 million barrels a day in the second half of the year. With limited supply growth elsewhere, the market is likely to outstrip supply even if Opec + reaches an agreement to increase production, keeping oil prices in the $75-80 range in the second half.

Tight supply is keeping bulls confident. As the COVID-19 pandemic eases more countries regions reopen, international oil demand must gradually recover. If Opec + members refuse to meet each other half way, demand growth will cause the oil market to tighten faster than expected in the absence of a rebound in the economy a significant increase in crude production, a return to $100 / b is out of the question.

In its monthly report back in June, the International Energy Agency (IEA) warned that the world needs more oil as demand increases could reach pre-COVID-19 levels next year. Crude oil prices could soon hit $100 a barrel if producers such as Opec do raise supply levels.

High international oil prices are bound to have a negative impact on consumers drag down the economic recovery in some areas. In particular, the impact on enterprises at the extended end of the oil industry chain is more direct. Producers are faced with the pressure of increased costs must deal with it carefully.

to be careless, the international oil price is also facing two-way risk. In recent years, Opec has had its share of domestic foreign problems, internal divisions among its members to the rise of the US as a major oil exporter, to a global shift to cleaner energy, to tensions between the US Saudi Arabia, Opec's big exporter. Many of these challenges are related to the US, most notably shale gas.

Opec has been caught off guard by the US's success in the shale gas revolution this century, thanks to technological advances that have made it the world's largest oil producer. In order to better coordinate production stabilize prices, Opec has sought to strengthen cooperation with Russia other ten non-OPEC oil exporting countries. Despite opposition the United States, Opec + was established in 2016 to coordinate policy goals between Opec non-OPEC members.

The main reason why the United States is suspicious of Opec + is that Moscow will use it to expand its influence over the global oil market. Indeed, the OPEC-Plus partnership has also created new tensions for America's Allies in the group, who are now often caught between the demands of Washington Moscow.

Historically, Opec's relationship with the US has been rocky since 1973. Presidents starting with Nixon have advocated energy independence, with considerations such as reducing dependence on Opec oil, reducing the U.S. trade deficit, making the U.S. economy more resilient in the face of fluctuating oil prices, ultimately reducing U.S. focus investment in the Middle East.

There is no doubt that the shale oil revolution represents a powerful step in the direction of American energy independence. The challenge posed by the United States, now more less a competitor to the Middle East instead of just a big customer, may be easy to deal with, but Opec + 's biggest worry may lie within.

After Qatar left Opec, the UAE was said to have flirted with leaving the group. If Opec + talks fail to achieve a breakthrough, Saudi Arabia continues to be aggressive in diplomacy, it may stimulate the internal divisions of the group to continue to grow, the cohesion of Opec + may be further undermined. It is impossible for the UAE to choose to leave the group. At that point, producers would decide their own output would no longer be subject to any cutbacks, leaving the cartel in name only.

Global oil supply structure is concentrated, spare capacity is abundant, supply elasticity is greater than demand. There are reasons to worry that oil prices could plummet with the impact of a surge in oil supply, although that seems a small possibility at the moment.

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Source: China Energy Network