As the epidemic is under control and the global economy continues to recover, the WTI crude oil main contract on the Nymex exchange has increased by more than 50% from US$48/barrel at the end of December 2020 to US$73/barrel. The continued rise in prices has oil-producing countries gearing up, hoping to gradually restore the scale of production cuts in 2020. In April 2020, OPEC+ decided to reduce production by 9.7 million barrels per day starting from May 1, 2020 for a period of two months; from July 1 to December 2020, it would reduce production by 7.7 million barrels per day; from January to January 2021 In April 2022, production will be reduced by 5.8 million barrels per day. The OPEC+ meeting at the end of June 2021 hopes to pass a vote to restore crude oil production to 400,000 barrels per day per month from August to December this year, a cumulative increase of 2 million barrels per day, and plans to reduce production originally scheduled to end in April 2022. The agreement is extended until the end of 2022. Just when the market expected that the production increase agreement would be passed smoothly, the UAE voted against it. The UAE stated that it does not object to OPEC+’s overall production increase plan, but its own production reduction baseline should be raised from 3.168 million barrels per day (production in October 2018) to 3.841 million barrels per day (production in April 2020). In fact, in the production reduction agreement reached in April 2020, except for Saudi Arabia and Russia, which used 11 million barrels per day as the baseline, other members reduced production based on October 2018 production.
To put it simply, the UAE hopes to ask for an additional 670,000 barrels per day at a time when everyone is looking forward to increasing production. Why did the UAE vote against it?
The UAE’s market share is being eaten up
Currently among OPEC, Iran, Libya and Venezuela are Countries are exempt from the voluntary production reduction plan, so among the thirteen OPEC countries, only 10 countries actually participate in production reductions. We add Russia, the largest country outside OPEC, to the analysis to see which countries have reduced production since April 2020. Benefit.
From the perspective of production, Saudi Arabia, which has deep pockets, accounted for 27.74% of production before the production reduction, but in the recent June it only accounted for 24.26%, and its share fell by 3.48%; The United Arab Emirates fell 1.37% from 8.81% to 7.44%, ranking second. On the other hand, Libya, which suffered force majeure at Hariga Port, received an exemption, and its share of output increased by 2.96% from 0.22% to 3.17%; Iran, which is still subject to US sanctions, increased by 2.06% from 4.69% to 6.75%; Russia increased by 1.11% from 27.14% to 28.25 %. The UAE’s market share is being gobbled up. And judging from the quotas and production data, Saudi Arabia is the best compliant, and other countries have exceeded the standards to a certain extent. Therefore, from the perspective of the UAE, it feels like bullying honest people.
From the perspective of quota allocation, if we look at the production scale in October 2018, Saudi production accounts for 24.59% and the quota share is 29.07%. Russia’s production accounted for 26.30%, and its quota sharing was 29.49%. Iraq’s production accounted for 10.73%, and its quota sharing was 12.30%. The UAE’s production accounted for 7.18%, and its quota sharing was 8.37%. The UAE hopes to improve the baseline, but in fact it feels that its quota sharing ratio is too high. , indeed in terms of the proportion of additional burden sharing, the pressure borne by the UAE is indeed slightly higher than that of Russia and Iraq.
The UAE has a lot of vacant production capacity
Due to the impact of the epidemic, the economies of various countries have been affected to varying degrees. As the first country in the Gulf region to realize the need for economic diversification, the United Arab Emirates, in addition to creating an economy through crude oil production, is also a world-renowned commercial and tourism center. Dubai’s Burj Khalifa, Burj Al Arab, and Palm Island are all well-known tourism at home and abroad. Attractions.
However, due to the epidemic, tourism and travel were blocked, and the UAE suffered a double blow. In order to complete the transformation as soon as possible, the UAE planned to increase production before the epidemic, so it invested billions of dollars to increase production. Production capacity has not been suspended during the epidemic. After all, the demand for crude oil will also increase after the economy recovers. In fact, it is similar to the fact that restaurants have to close due to the epidemic, but the store still chooses to decorate at this time.
Therefore, the UAE’s production capacity in June 2021 is 4.2 million barrels, an increase of approximately 23.53% from April 2020. The current domestic spare capacity (capacity-output ) accounted for 18.03%, ranking second among OPEC countries, following Saudi Arabia. Saudi Arabia’s GDP in 2019 was US$793 billion, while the UAE’s GDP was only US$421.1 billion. The economic size of the two is quite different. Among OPEC+, Saudi Arabia must bear the greatest pressure, but if the big countries don’t bear the pressure, who will bear it, right?
The UAE believes that it has a lot of vacant production capacity, and its share has been being eaten up. In addition, there are no quota restrictions. Iran, which is eyeing it, has always stated that it will restore the damage caused by US sanctions. production capacity, so it had to veto the production increase agreement in order to obtain higher production. With an agreement to increase production pending and talks on the Iran nuclear deal pending, crude oil will experience greater fluctuations in the third quarter, bringing opportunities to investors.
CME will launch micro WTI crude oil futures contract on July 12th
CME responds to market demand , launched a smaller micro WTI crude oil futures (MCL), with a contract size of only 100 barrels, which is the original standard contract 11/10 of 000 barrels, using cash settlement, and expires one day before the WTI standard futures expiration date. The summary of the contract is as follows:
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