Crude oil is demonstrating yet again its penchant for what markets hate most: surprise. Last month, the Organization of the Petroleum Exporting Countries (OPEC) and collaborating governments were carefully easing the production cuts with which they steered the market through an oil-demand crisis caused by the COVID-19 pandemic. Demand was recovering as economies reopened after being locked down during most of 2020 and early 2021. And the near-month futures price for light, sweet crude on the New York Mercantile Exchange (NYMEX) — having closed below zero for the first time ever on April 20, 2020 — rose above $70/bbl for the first time since October 2018. Until mid-June, the market’s main concern was the potential for a supply surge if Iran escaped sanctions by agreeing with the U.S. to again suspend nuclear development. Surprise! Only days after his election as Iranian president on June 18, Ebrahim Raisi announced new limits on what his government would negotiate regarding nuclear work and said he would not meet with U.S. President Joe Biden. Suddenly, new oil supply from Iran looked less imminent than it did before Raisi’s election. Then July arrived. Surprise! OPEC members and nonmembers, collectively known as OPEC+, which had been voluntarily limiting production ended an important meeting without agreeing, as had been expected, to extend their phasedown of supply restraint. Suddenly, the market had to wonder whether the result would be too little supply or a price-crushing production spree if OPEC+ discipline collapsed. In today’s blog, we examine how these developments relate to each other in the twin contexts of a rebalancing oil market and of past oil-supply management.
After last year’s craziness, it can be hard to remember that the OPEC+ agreement predated the COVID pandemic by several years. Officially known as the Declaration of Cooperation (DOC), the deal came together in late 2016 in response to a price collapse that began in mid-2014 (see Is This the Real Life? Is This Just Fantasy?). As agreements to limit production go, this one has had impressive staying power. It has survived competition (especially from oil produced from U.S. shale), membership changes, and — most dramatically — the March 2020 rift between production leaders Saudi Arabia and Russia, which we blogged about in Wipe Out. In fact, as we noted in Heal Me, the OPEC+ group refashioned the DOC in April 2020 to move forward from that brouhaha, importantly assigning the two disputants equivalent quotas of 11 MMb/d each and agreeing to cut OPEC+’s production by a total of 9.7 MMb/d for two months and by diminishing amounts later. The collective production cut now is down to 5.8 MMb/d. It was at a July 1 meeting of OPEC+ representatives that a new, market-rattling dispute emerged, this one between Saudi Arabia and the United Arab Emirates (UAE; see What a Fool Believes).
We’ll cover the Saudi-Emirati flare-up in a minute. First, we need to look at the fading prospects for new Iranian supply anytime soon to illustrate the market conditions under which all this plays out and then to show how these surprises are linked.
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