(Repeats with no changes in text. The opinions expressed here are those of the author, a columnist for Reuters.)
LAUNCESTON, Australia, July 5 (Reuters) - The OPEC+ group of oil exporters is struggling to reach a compromise over just how much more crude to supply to the market, but assuming a deal is eventually cut, it’s likely to be bearish for prices.
The group had agreed last week to boost its production by a total of 2 million barrels per day (bpd) from August to December. But that accord wasn’t ratified after the United Arab Emirates (UAE) wanted changes that would allow it to increase its output by a larger amount.
OPEC+, which groups the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, has largely been viewed by the market as successful in first stabilising oil prices in the wake of the hit to fuel demand from the coronavirus pandemic, and then boosting them to the highest in almost three years.
Disagreements between members of the group have been rare, but not unprecedented. A clash between leading members Saudi Arabia and Russia led to a brief price war in April 2020 that at one point helped drive global benchmark Brent futures to the lowest in two decades.
The current dispute centres on the UAE seeking to change the baseline upon which its output quota is decided, from the original 3.168 million bpd in the 2020 agreement to 3.84 million bpd.
In effect, this would allow the UAE to increase its own output by an additional 672,000 bpd over and above its share of the planned 2 million bpd by December for OPEC+ as a whole.
OPEC+ will resume talks on Monday. If history is any guide, it’s likely some sort of compromise will be hammered out between the various parties.
What shape that compromise may take is still to be determined, but it’s almost certain it will involve more barrels being added than the planned 400,000 bpd per month from August to December.
The question for market participants is whether they believe the ongoing recovery in demand is strong enough to offset the likely addition of barrels from OPEC+, as well as from producers outside the group keen to take advantage of the current strength in prices.
One noted bull is Goldman Sachs: the investment bank said in a June 29 report that it expects a rise of 2.2 million bpd in demand by the end of the year, leaving the market facing a 5 million bpd shortfall.
This, of course, doesn’t include the additional 2 million bpd proposed by OPEC+ last week, nor any additional compromise barrels that the UAE may be able to achieve.
But under Goldman’s scenario there is still a substantial shortfall of supply, meaning prices could continue to rally.
The ‘known unknown’ is just how the pandemic plays out, especially in Asia, the top oil-importing region where demand growth so far this year has been lukewarm amid ongoing lockdowns and an apparent loss of inventory building by China, the world’s biggest crude buyer.
Asia’s imports in June are estimated at 24.24 million bpd by Refinitiv. That’s up from May’s 23.04 million bpd, but still below the 24.54 million bpd in April and March’s 24.79 million bpd.
Taking a more global view, the current picture also isn’t exactly screaming a massive rise in demand. Data from commodity analysts Kpler shows total world imports of 1.858 billion barrels in June, equivalent to 61.9 million bpd, down from 1.947 billion barrels in May and also below the three-month moving average of 1.906 billion barrels.
With global inventories still above long-term averages, there doesn’t appear to be any physical shortage of crude. The current rally in prices appears to be largely investor-driven and linked to a broader positive theme in commodities.
Brent has gained 48% so far this year and was trading around $76.02 a barrel in early Asian trade on Monday.
But the contract has been stuck in a fairly narrow range around $74-$76 a barrel for the past two weeks. It’s possible that the market may come to the view that whatever the final OPEC+ agreement is, it could be enough to cap the rally - for now at least.
Editing by Kenneth Maxwell