Is there oil price war coming again?

Is there oil price war coming again?

Energy prices are hovering above the $75 level after OPEC and its allies could not reach a key deal on their oil output policy last week, amid rising tensions between Saudi Arabia and the UAE.

Crude prices are seeing some volatility after an initial spike, but retreated slightly on Monday. Brent futures slipped 0.11% to $76.09 per barrel, while U.S. crude futures dipped 0.13% to $75.06 per barrel.

The energy alliance, often referred to as OPEC+, will meet again on Monday after failing to reach a deal twice last week. Without a deal, oil prices could surge and threaten to derail a frail economic recovery. If talks fall through, there could also be a price war — though analysts do not think the latter scenario is likely.

The United Arab Emirates blocked a deal to increase oil output and extend the expiry of the group’s broader production supply agreement to the end of next year, according to Reuters. The UAE said the extension should be conditional on revising the so-called baseline, which determines how much a country is allowed to pump.

Both Brent and U.S crude shot up more than 2% to above $75 per barrel on Thursday, reaching highs not seen since 2018. The deal first fell through on Thursday, and a second meeting on Friday failed to see any breakthrough as well.

Oil prices have surged more than 45% in the first six months of 2021, with demand rising as global economies reopened.

The deal includes an agreement to increase oil output gradually, while at the same time, extending the duration of broader cuts that the group agreed to in 2021.

If OPEC+ fails to reach a deal to increase output, prices could skyrocket, CNBC reported.

Rising oil prices could destroy demand growth at some point, and risk the recovery of economic growth just as several economies are starting to reopen after Covid vaccinations rise.

A “bullish” outcome for oil prices would be if the group sticks to the original deal — with no production increase, according to Helima Croft, head of global commodity strategy at RBC Capital Markets. 

“How the deal dies will matter for markets. An unambiguously bullish outcome would be if the group simply opts to stick with the original tapering timeline and signal its intent to keep 5.8 mb/d off the market until April 2022,” she wrote in a note on Friday.

However, RBC Capital Markets says that the prospects of $100-per-barrel oil is so “politically unpalatable” that U.S. administration officials will “appeal to the principal stakeholders in an attempt to prevent a virtual fireworks display on Monday.”

On the flip side, a price war could be imminent as well, if the talks go haywire. 

“If the talks end in utter discord, there is a risk of a return to an every-man-for-himself production scenario that could cause a reversal of this year’s oil price rally,” Croft wrote. “We do not see this as the likely outcome, but cannot dismiss it entirely either. Certainly, it is not a black swan scenario.”

“So, in the very near term, a lack of agreement, obviously would mean that all production is loose, and that everybody starts close to a price war,” Alejandro Barbajosa, vice president of crude Middle East and Asia Pacific at Argus Media, told CNBC on Monday. He added, however, that he does not think “OPEC is gonna go anywhere near that.”