In October 2018, flames burned down at an oil processing facility in the Saudi Aramco oil field in the Rub ‘Al-Khali desert in Shaybah, Saudi Arabia.

Simon Dawson | Bloomberg | Getty Images

Energy prices soar above $ 75 after OPEC and its allies failed to reach a major agreement on their oil exploration policy last week amid mounting tensions between Saudi Arabia and the United Arab Emirates.

Crude oil prices are experiencing some volatility after an initial spike, but fell slightly on Monday. Brent futures were down 0.11% to $ 76.09 a barrel, while US crude oil futures fell 0.13% to $ 75.06 a barrel.

The Energy Alliance, often referred to as OPEC +, meets again on Monday after failing to reach an agreement twice last week.

Without a deal, oil prices could rise and undo a weak economic recovery. Should the talks fail, there could also be a price war – although analysts do not consider the latter scenario to be likely.

Why oil prices have skyrocketed

The United Arab Emirates – a long-time ally of OPEC leader Saudi Arabia – had objected to the agreement twice in the past week, according to Reuters.

The deal includes an agreement to gradually increase oil production while extending the duration of the wider cuts the group agreed to in 2021.

Last year, OPEC + agreed to cut production by nearly 10 million barrels per day from May 2020 to the end of April 2022 to cope with lower demand due to the Covid crisis and less travel.

How the deal ends will matter to the markets. A clearly bullish result would be if the group simply chose to stick to the original tapered timeline.

Helima Croft

Head of Global Commodity Strategy, RBC Capital Markets

At last week’s meeting, the OPEC king and non-OPEC leader also suggested Russia extend the duration of the cuts until the end of 2022, according to Reuters.

Top producers Saudi Arabia and Russia have reached a preliminary agreement that would basically increase supply by 400,000 barrels per day from August to December 2021 to meet rising demand, Reuters reported, citing unnamed sources.

What the UAE want

The UAE “unconditionally” supports an increase in production, its energy and infrastructure minister told CNBC on Sunday.

“The problem is a condition of this increase, namely the extension of the agreement,” Suhail Al Mazrouei told CNBC’s Hadley Gamble, adding that the current proposal for the UAE is simply “not a good deal”.

The crux of the matter is the baseline. Production cuts or increases are measured on a baseline – the higher this number, the more oil a country is allowed to pump.

The UAE wants its baseline revised before these cuts are extended to the end of 2022 as they want to produce more than is currently allowed based on the current baseline.

The current baseline for the UAE was carried over from October 2018 when it was producing around 3.2 million barrels per day. Last year the number rose to 3.8 million barrels a day.

The UAE argue that the frame of reference for the 2022 extension should not be carried over from four years ago.

“Now we think that it is just not realistic to link the extension of the agreement to a reference that goes back to 2018 and starts from 2022, as that is four years,” Al Mazrouei told CNBC.

“That’s totally unfair.”

The United Arab Emirates have invested billions in their oil exploration capabilities to increase production. However, the countries can only renegotiate their baselines at the end of the current production agreement – which Saudi Arabia and Russia now want to extend.

Why it matters

If OPEC + doesn’t make an agreement to increase production, prices could skyrocket.

Rising oil prices could at some point destroy growth in demand and jeopardize the recovery in economic growth, just as several economies reopen after the rise in Covid vaccinations.

A “bullish” result for oil prices would be if the group stuck to the original agreement without increasing production, said Helima Croft, head of global commodities strategy at RBC Capital Markets.

“How the deal ends will matter to the markets. A clearly bullish result would be if the group simply chooses to stick to the original expiration date and signal its intention to get 5.8 mb / d off the market by April 2022 keep away, “she wrote in a Friday note.

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However, RBC Capital Markets says the prospect of $ 100 a barrel of oil is so “politically inedible” that US government officials “will appeal to key stakeholders to prevent virtual fireworks on Monday”.

On the other hand, a price war could also be imminent if the talks go haywire.

“If the talks end in total disagreement, there is a risk of a return to a production scenario that is each individual’s own, which could reverse this year’s oil price rally,” wrote Croft. “We do not see this as a likely result, but we cannot reject it entirely. It is certainly not a black swan scenario.”

“In the short term, a lack of an agreement would obviously mean that all production would be interrupted and everyone on the brink of a price war,” said 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 believe that “OPEC will go anywhere near that.”

– Additional coverage from CNBC’s Sam Meredith, Dan Murphy and Hadley Gamble.

Correction: This article has been updated to accurately reflect that the current October 2018 baseline for the UAE has been carried over.