OPEC+ is in crisis again–but since no one knows quite what the result is likely to be, we've had big swings in sentiment and prices in the oil market
The OPEC+ abandoned their Monday meeting after days of tense talks failed to result in an agreement on a tentative deal to increase production, and even over how to measure production. The disagreement between Saudi Arabia and the United Arab Emirates was so heated that OPEC+ couldn't even agree on a date for its next meeting. When these two countries last clashed in December 2020, the UAE talked of leaving OPEC.
Oil prices initially jumped to its highest level in more than six years on news that OPEC+ had failed to agree to increase production. But prices then fell as traders speculated that the failure to reach an agreement on production increases would result in unplanned increases in production.
The collapse of the OPEC+ talks led to volatility everywhere as traders struggled to figure out how the news would affect the dollar, inflation, interest rates, and economic growth. And on what time scale.
The immediate result of the collapse in talks is that the output hike expected for August won't take place. That, in this short run, is likely to result in higher oil prices. Yesterday, for example, state-run Saudi Aramco increased the prices of its Arab Light crude and other grades for August delivery.
But over the medium term, the collapse could lead to an increase in production. For example, commodities traders reported that many U.S. oil shale producers jumped on the early surge in prices to lock in higher prices for their future production. That's likely to result in an increase in U.S. production. Russia has been violating existing OPEC+ production agreements by over-producing and now there's no reason not to continue that practice or to produce even more. The UAE wanted to expand production, claiming at the meeting that it can pump much more than the 3.2 million barrels a day quota under the current OPEC+ agreement. The country wanted an increase to 3.8 million barrels daily in exchange for extending the supply agreements signed in April 2020 until the end of 2022. In essence the UAE claimed that it was suffering more under the agreement than other OPEC members and should be allowed to increase production. The Saudis disagreed–both on the extent of UAE pain and on increasing production.
It's not at all clear how the collapse of the OPEC meeting will affect the prices of other assets–to a great degree because no one yet knows what the effects of the collapse will be on oil production.
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