Oil prices catapulted to new highs this morning before turning lower due to broader financial pressures and a rising US dollar. Last week, the world waited for an OPEC+ deal to increase production later this year – a deal that did not materialize. After three votes, the group cancelled its meeting for Monday, walking away with no agreement on future production increases. Failing talks mean production cuts will remain in place, spurring further concerns of a supply shortage and rising prices. The Biden administration is urging OPEC+ members to compromise to prevent higher oil prices from harming the global economy.
The UAE balked at extending cuts through the end of 2022, eight months longer than the original agreement required. Insisting on a higher base of production, the UAE held talks hostage last week in an effort to secure an extra 700 kbpd of output. The country is investing billions to grow its output from 3.8 MMbpd to 5 MMbpd by the end of the decade; current OPEC cuts assume they can only produce 3.2 MMbpd. The country also wants to establish its own futures market for its local Murban crude blend – a first for an OPEC country. By holding the line and demanding recognition for its oil production capacity growth, the UAE is setting the foundation for its future investment in oil demand.
A flood of reports are focusing on growing competitiveness between the UAE and Saudi Arabia, two dominant oil producers in the region. Although the two are aligned on certain regional security problems, including countering Iran, they differ on a wide range of geopolitical and economic issues. With the two parties pursuing different outcomes, it’s unclear how quickly a deal will come to fruition. Consumers may be waiting a bit longer for relief from higher prices. Even when a deal does come, it may provide just temporary relief since the planned increase of 400 kbpd each month would not bring enough supply online quickly enough to keep pace with surging demand.
Americans especially are feeling the burden of failed OPEC+ talks, as the national average for gasoline is now well over $3 per gallon, an incredible seven-year high. With the fast-growing demand for gas, the United States government has pressured the oil giants to decide, and fast, about what production will look like. There is much uncertainty as many countries believe OPEC+ will fail to reach a decision anytime soon and that they should expect the worst. Even the Russian government is calling for a decision, but many do not expect the country’s leader Vladimir Putin to reach out to OPEC. Investors fear the worst over the coming weeks. It seems unlikely any critical decision will be made to increase output, which the world has been eagerly waiting for since the beginning of the summer.