An offshore drilling rig sits in the shallow waters of the Manifa offshore oil field, operated by Saudi Aramco, in Manifa, Saudi Arabia.
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The failure of talks between OPEC and its allies highlights the risks of a breakdown in the group’s unity and rekindles concerns about a possible oversupply of oil, a commodities strategist told CNBC.
The energy alliance, called OPEC +, was due to resume talks on Monday, but talks have been canceled for an indefinite period. It comes after the group twice failed to strike a key deal on their oil production policy Last week.
The group had sought to increase supply by 400,000 barrels per day from August to December 2021 and proposed to extend the duration of the cuts until the end of 2022. Last year, to cope with the drop in demand As Covid struck, OPEC + agreed to cut production by nearly 10 million barrels per day from May 2020 to the end of April 2022.
The United Arab Emirates had indicated that, while supporting the proposal to increase the offer, it opposed the terms of the extension, which he says should be conditioned on increasing its so-called baseline, which determines how much oil a country is allowed to pump.
“I certainly think there are risks that the market is really discounting right now and it’s a breakdown of that unity,” Daniel Hynes, senior commodities strategist at ANZ, told CNBC on Tuesday. .
“This has been, I think, by far the biggest advantage of this alliance over the past 18 months… the image it presents to the market around a coordinated and very compliant agreement that has not really seen any success. producers grow outside of that, ”he said. added.
But now the risks are increasing because of this conflict around the baseline, against which reductions or increases in production are measured. The UAE now wants this baseline to be increased in order to be able to produce more.
He argued that he was not alone, as Azerbaijan, Kuwait, Kazakhstan and Nigeria have also requested and obtained approval of new baselines since the deal began last year. , Reuters reported, citing an OPEC + source.
Hynes said the UAE, which now wants “this side deal” to increase production, poses “a risk to this unit, on this front.”
“I think this carries over-supply risks especially in the medium term,” he said.
Hynes doesn’t rule out an upcoming price cut, but said he doesn’t think there will be a price war.
“I think it would obviously be at risk if we started to see producers really pushing their own agenda and, in a sense, getting out of this supply deal,” he told CNBC.
“But you know it’s all about perception and I think if the market perceives that it will not adhere to these current quotas then clearly it is going to assume the worst and that will end up seeing oil prices. weak, “he added. .
Oil prices hit their highest levels in nearly three years on Monday, after talks were postponed indefinitely.