A surprise OPEC+ meeting yesterday to ratify the bilateral agreement between Saudi Arabia and the UAE following the failure to achieve consensus at the OPEC+ meeting in July has weighed on oil today.

The group has agreed to add 400kb/d of production from August (in line with the proposal blocked by the UAE at the July meeting) and has also decided to extend OPEC+ cooperation through the end of 2022 (also in line with the proposal reportedly presented at the July OPEC+ meeting).

Photo by Timothy Newman on Unsplash

The new twist here is that monthly production increases will continue until the shut-in OPEC+ production of 5.8mb/d has returned. The baseline capacity levels are revised for the UE, but for Saudi Arabia, Russia, Iraq, and Kuwait (for a total of ~+1.6mb/d). The market has reacted predictably to the prospect of new supply phased in and simultaneously fretting over the news about the rapid spread of the delta variant of COVID in some regions.

While the new OPEC+ agreement does limit the likelihood of some extremely bullish Q4 oil price scenarios playing out, it also reduces the downside risk of OPEC+ falling apart. We may still see some dickering around individual quotas within OPEC+. And there may be an additional weakness as bulls positioned for higher oil prices get squeezed. Still, this is not a significant adverse outcome as it increases the probability of an orderly return to normal production levels for heavy-weight oil producers. I expect the focus will now shift to understanding the risks on the demand side.