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OPEC + closes an agreement to boost production as Gulf allies call for a truce

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By Javier Blas, Salma El Wardany, Grant Smith and Dina Khrennikova

(Bloomberg) –

OPEC and its allies reached an agreement to inject more oil into the recovering global economy, overcoming an internal divide that threatened the cartel’s control of the crude market.

An unusually public dispute that put the group’s unity to the test was resolved into a classic compromise: Saudi Arabia met the UAE midway in its demand for a more generous production cap.

The deal, agreed at a hastily convened Sunday meeting ahead of a long Islamic holiday, allows for monthly supply increases of 400,000 barrels a day and returns OPEC + control of the market after two volatile weeks.

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Prices in New York initially rose to a six-year high in New York in early July after talks to boost production failed, before falling back to $ 70 a barrel as traders considered the possibility of that the alliance could be undone.

That risk has been avoided, at least for now. The Riyadh and Abu Dhabi ministers made a grand display of their continued friendship and commitment to the alliance, setting aside the acrimony that led to the collapse of the OPEC + talks earlier this month.

“Building consensus is an art,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters after the meeting. The agreement is proof of the strong ties between the members and shows that “OPEC + is here to stay,” he said.

The cartel will begin ramping up production next month and will continue until all of its 5.8 million barrels per day of stopped production has been reactivated. A deal on this was only possible because the UAE and several other countries, including Russia and Saudi Arabia, will receive higher baselines against which their production cuts will be measured, starting in May 2022.

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The UAE’s level rose to 3.5 million barrels per day, down from the 3.8 million it demanded when it blocked an OPEC + deal earlier this month, but above the baseline. previous of 3.17 million. The baselines for Saudi Arabia and Russia increased by 500,000 barrels per day to 11.5 million.

Supply pressure

The truce between the two long-standing allies will alleviate an impending supply contraction and reduce the risk of an inflationary surge in the price of oil. It also ends a diplomatic delay that made traders nervous, reviving speculation that the UAE might be willing to leave OPEC, as it threatened to do last year.

“It’s a very public vote renewal,” said Helima Croft, chief commodities strategist at RBC Capital Markets. “Time will tell if it will be enough to completely silence the talk on compromise issues.”

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The deal has several important consequences. As demand recovers, it offers consumers a clearer view of how quickly OPEC + will reactivate production it still holds, after making deep cuts last year in the initial stages of the pandemic.

Nothing is set in stone. OPEC + will continue to hold talks every month, including a market review in December. It could adjust the schedule if necessary, said Prince Abdulaziz of Saudi Arabia. The next meeting is September 1.

However, the baseline adjustments will not alter the pace of monthly production increases of 400,000 barrels per day when they take effect next year, he said.

“With monthly meetings, the group wants to keep its hand on the wheel of the oil market,” said Giovanni Staunovo, commodities analyst at UBS Group AG. The added volume will keep the market fairly tight “so I would still expect prices to trend up in the short term, before declining slightly towards the end of the year.”

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Internal tensions

The agreement also resolves long-standing grievances that have caused tensions within OPEC + since late 2020. The UAE has long argued that the way its quota was calculated was unfair because it did not reflect an expansion in the industry. from the country.

The problem had been fixed for months before finally erupting into a particularly bitter dispute. Ministers in each country used media interviews to make their case, evoking memories of the 2020 price war between Saudi Arabia and Russia.

With a successful deal on the exchange, both countries emphasized the strength and friendliness of their relationship.

“The UAE is committed to this group and will always work with it,” Energy Minister Suhail Al-Mazrouei told reporters after the meeting. He thanked Saudi Arabia and Russia for fostering a constructive dialogue that allowed for an agreement.

© 2021 Bloomberg LP

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