OPEC’s family feud pumps oil prices

The dysfunction within OPEC Plus was on full display after the cartel, which includes Russia, failed to agree to raise oil production by the expected 500,000 barrels a day until the end of the year. 

The squabble sent oil prices to a six-year high before pulling back after Russia attempted to diffuse the family feud. 

Ticker	Security	Last	Change	Change %
USO	UNITED STATES OIL FUND - USD ACC	73.20	+1.18	+1.64%

Market watchers thought the production increase was a given as they were expecting OPEC to start giving back some of the collective 9.7 million barrels a day production cut that the group agreed on in 2019. 

This as oil demand is rebounding at a faster than expected clip from the COVID-19 dropoff.  

What exactly happened? 

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The United Arab Emirates stood up against Saudi Arabia declaring that the baseline from which the group is judging the OPEC production increase is unfair to them, because at that time the country was producing less oil. They wanted to change the base production levels to April 2020, when the production cut was agreed on. That is because the UAE's crude production in October of 2018 was 3.160 million barrels a day but it had increased to 3.841 million barrels a day by 2020. By changing the base production level, the UAE would be able to increase its production drastically and immediately.

Ticker	Security	Last	Change	Change %
BNO	UNITED STATES BRENT OIL FUND - USD ACC	29.57	+0.45	+1.55%

Without an agreement, it is expected that OPEC will keep oil production at current levels, which means it will probably have the global market being undersupplied somewhere in the area up to 2,000,000 barrels of oil per day. That supply versus demand deficit means that oil prices could surge into the $80.00 a barrel area and cause some economic harm if it continues to rise unchecked.

The UAE is a growing economic power in the OPEC cartel, challenging Saudi Arabia for economic dominance of the region. Part of this OPEC Plus drama may be the good old-fashioned economic competition. The UAE holds its ground firm when it comes to wanting a bigger slice of the OPEC production pie but it may also want a bigger say in the OPEC plus cartel. The UAE has dropped hints that if they don't get a bigger slice of the pie and a bigger seat at the table, they may leave the group. The UAE is getting tired of playing second fiddle to Saudi Arabia, the de facto leader of the OPEC cartel.

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But don’t forget about Russia, which is the third big part of this equation. The Russians are very concerned about high oil prices and they do not need as high of an oil price as Saudi Arabia or the UAE to show a profit. Russia traditionally has been more hawkish on oil production increases as they fear that they will lose market share to other producers. Saudi Arabia isn't worried about losing market share as they are already raising prices for oil to all of their customers in Europe, the U.S. and Asia. The Russians say that the agreement is not acceptable.

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Now in the past, we would expect the U.S. energy producers to rise to the occasion and fill that production void but because of policies implemented by the Biden administration, we've seen a lack of investment in U.S. oil and gas. 

Ticker	Security	Last	Change	Change %
XOM	EXXON MOBIL CORP.	121.91	+1.56	+1.30%
CVX	CHEVRON CORP.	161.63	+0.33	+0.20%
COP	CONOCOPHILLIPS	111.89	-1.54	-1.36%
HAL	HALLIBURTON CO.	31.87	+0.67	+2.15%

The administration's push toward green energy is leaving the U.S. more susceptible to price spikes created by the OPEC cartel. By not allowing U.S. energy producers to do what they do best, it is unlikely we're going to be able to separate our economy from the drama of the OPEC plus cartel. 

It also means that money that traditionally would go to U.S. energy producers, creating U.S. energy jobs and benefitting U.S. citizens, is increasingly going to the dysfunctional family of the OPEC plus Russia cartel.

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Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com.