Energy

<p style="text-align: left;">&nbsp;</p><ul style="text-align: left;"><li>New supply policy involves cautious, controlled tapering till all cuts are unwound</li><li>Five members get new baselines, indicating art of deal-making still alive in OPEC+</li><li>Higher baselines do not mean higher overall output!</li><li>Setting a longer-duration supply policy and end-goal show evolution of strategy</li><li>As OPEC+ unwinds output curbs, it&rsquo;s going to be all about market share</li><li>Challenges ahead: Iran&rsquo;s return, expected US output rebound, quota-busting</li></ul><p style="text-align: left;">&nbsp;</p><p style="text-align: left;"><strong><u>The Agreement</u></strong></p><ul style="text-align: left;"><li>Energy ministers of the OPEC/non-OPEC alliance on July 18 agreed on a collective crude supply boost of 400,000 b/d each month from August and going into next year, until all the remaining production cuts are unwound. If the output hikes proceed as planned, without any tweaks that may be necessitated by changing market conditions, the 5.8 million b/d of supply currently withheld from the market should be back roughly by September 2022.</li><li>The United Arab Emirates secured a 332,000 b/d increase in its baseline effective May 2022, about half of what it had sought in a surprise request that triggered a deadlock within OPEC+ hours ahead of its ministerial meeting on July 1.</li><li>Unexpectedly, OPEC+ also approved an upward revision in the baselines for four other members from May 2022. Saudi Arabia and Russia will have their baselines upped to 11.5 million b/d each from the current 11 million b/d. Iraq and Kuwait got a 150,000 b/d boost in their baselines, to 4.80 million b/d and 3.96 million b/d respectively.</li><li>The master agreement of April 2020 between the 23-member alliance to restrain output in a bid to rebalance the global oil market following the Covid-induced demand slump was extended by eight months to the end of December 2022. But as Saudi Energy Minister Abdulaziz bin Salman said on Sunday, he hopes all the cuts will have been reversed by September next year.</li><li>The ministers will continue to hold monthly meetings to review the policy and make any course corrections deemed necessary.</li></ul><p style="text-align: left;">&nbsp;</p><p style="text-align: left;"><strong><u>Our take</u></strong></p><ul style="text-align: left;"><li><strong>INTACT, IN COMMAND, AND HAWKISH: </strong>The latest challenge to OPEC+&rsquo;s integrity may have actually fortified it. OPEC+ remains firmly in control of supply and is endeavoring to keep the market tightly balanced &mdash; or perhaps even a bit undersupplied &mdash; in an effort to sustain crude in the $70s. The final deal that emerged on Sunday from what had seemed like a serious deadlock since July 1 appears to be a &ldquo;new, improved&rdquo; version of the one that was scuppered by the UAE&rsquo;s demand for a higher baseline.</li><li><strong>WISE PIVOT TO LONGER-TERM GUIDANCE: </strong>The 400,000 b/d of monthly tapering plan until all remaining 5.8 million b/d of cuts are unwound &mdash; hopefully by September next year &mdash; provides longer-term guidance to the oil market. At the same time, it shines a light at the end of the tunnel for the OPEC+ members who are likely battling restraint fatigue at this point.</li><li><strong>RACE TO RECLAIM MARKET SHARE: </strong>A higher baseline for the UAE was expected after reports last week that it had reached an informal understanding with de-facto OPEC leader Saudi Arabia. The UAE&rsquo;s new baseline of 3.50 million b/d from May 2022 is much lower than the 3.80 million b/d it had sought and curiously, also below the 3.65 million b/d compromise figure that had circulated in media reports last week. We assume it is keeping the UAE satisfied for the time being, but would watch out for any further signs of discontent.</li></ul><p style="text-align: left;">The unexpected hike in baselines for Saudi Arabia, Russia, Iraq and Kuwait makes an even bigger statement &mdash; It is now all about protecting and competing for market share as global demand recovers and OPEC+ proceeds to open the spigots. Look out for tensions on this front in the coming months, with quota-busting likely to return centre-stage.</p><ul style="text-align: left;"><li><strong>HIGHER BASELINES DO NOT MEAN HIGHER OUTPUT: </strong>The higher baselines, totalling about 1.63 million b/d, do not mean more output than planned after May 2022. It&rsquo;s worth bearing in mind that OPEC+ decides on the change its the overall production ceiling and then parcels it out to participating members in proportion to their share of the total output. The new baselines simply mean that the UAE, Saudi Arabia, Russia, Kuwait and Iraq will either take a bigger share or preserve their current share of the 400,000 b/d&nbsp;monthly hike &mdash; or any other number that supersedes it under OPEC+ agreements &mdash; from next May at the cost of the shares of their peers. See table on page 3 for the before-and-after percentage shares.</li></ul><p style="text-align: left;">The five countries getting higher baselines are the main swing producers of OPEC+.&nbsp;The others may not have sought an increase as they may be incapable of or uninterested in raising production above their October 2018 levels.</p><ul style="text-align: left;"><li><strong>CHALLENGES AHEAD: </strong>OPEC+ may have emerged triumphant from the latest threat to its very survival but more&nbsp;challenges lie ahead.&nbsp;Aside from the threat of poor quota-compliance, which will need to be carefully managed in the coming months, especially from the repeat offenders, OPEC+ will need to navigate around a potential US-Iran nuclear deal unleashing more supply from the Islamic Republic into the market and a projected annual jump of anywhere between 500,000 to 800,000 b/d in US crude production next year as the shale sector begins ramping up output.</li></ul><p style="text-align: left;">Any sustained reversal in the optimistic global oil demand rebound picture in the coming months that forces a halt or reversal in the OPEC+ tapering would also be a test for the members&rsquo; collective resolve and integrity.&nbsp;</p><p style="text-align: left;">&nbsp;</p><p style="text-align: left;"><strong><u>Implications for crude prices</u></strong><u></u></p><p style="text-align: left;">Crude could resume an upward climb as the discount priced in on account of OPEC+ supply uncertainty, including the tail risk of a meltdown of the alliance, vanishes. However, lingering demand concerns on account of the Delta variant, coupled with bouts of risk-aversion in the broader financial markets will pose headwinds. Brent could hover in the $75-79/barrel range on days that demand optimism prevails and drop to $73-74 when risk aversion dominates.</p><p style="text-align: left;"><img style="display: block; margin-left: auto; margin-right: auto;" src="https://kradminasset.s3.ap-south-1.amazonaws.com/ExpertViews/vandana+image.PNG" /></p><p style="text-align: left;"><strong><u>Notes:</u></strong> Ten of OPEC&rsquo;s 13 members are bound by quotas (&ldquo;OPEC-10&rdquo; above) with Iran, Venezuela and Libya being exempted. The five countries with higher baselines from May 2022 are highlighted in bold. The current and post-April 2022 percentage share of each country is calculated based on the &ldquo;Total OPEC+&rdquo; baseline. The individual percentages determine each country's share of the collective output reduction or increase in barrels/day agreed by the OPEC/non-OPEC alliance.</p>