ASX energy shares in hotseat as OPEC+ struggles to contain crisis

It could be a wild ride for ASX energy shares as the OPEC+ oil cartel slumps into a new crisis.

A rare diplomatic spat between Saudi Arabia and long-time ally United Arab Emirates is threatening to rock the oil market.

The group of oil producing nations will meet for a third time later tonight to try to keep the alliance together, reported Bloomberg.

ASX energy shares at mercy of OPEC+

The ability for OPEC and Russia to accept production quotas was key to the Brent crude price more than doubling since its low in November last year.

The Brent price is currently at over US$76 a barrel and where it goes next will depend on Saudi Arabia bringing the UAE back into the fold.

Adding to the uncertainty is the prospect of the oil price surging higher or tumbling if the bloc cannot work out their differences.

ASX energy shares cheering the infighting

It seems that ASX investors see the discord as a bullish signal – at least for now. The Woodside Petroleum Limited (ASX: WPL) share price and Santos Ltd (ASX: STO) share price have jumped by over 2% each.

Meanwhile, the Beach Energy Ltd (ASX: BPT) share price gained 1% to $1.28 and Oil Search Ltd (ASX: OSH) share price added 0.3% to $3.87 at the time of writing.

In contrast, the S&P/ASX 200 Index (Index:^AXJO) has surrendered its morning gains and is trading only 0.1% in the black.

Rift between Saudi Arabia and the UAE

OPEC+ is trying to extend its agreement on production quotas in to 2022. The Saudis are insisting on its plan that will see production increase over the next few months and for a broader agreement to stay in place till end of next year for the sake of stability.

It’s reported that other members, including Russia, backs this plan.

However, the UAE is only supporting a short-term increase in output and is demanding better terms for itself for 2022.

Mexican standoff in the Middle East

The country wants its baseline to be increased from 3.2 million barrels a day to 3.8 million if it were to agree to the 2022 extension.

Each country measures its production cuts or increases against a baseline. This means that the higher the baseline, the more oil a country will be allowed to produce.

OPEC+ will stick to the current quotas until a new deal is struck, at least that’s the current stand of Saudi Arabia.

Why oil could surge or sink

Demand of oil has rebounded as lockdowns around the world eases and tight supply is driving the oil price higher.

On the other hand, if the UAE decides to leave OPEC, a threat it has made before, others in the group may decide not to stick to their quotas.

This could see a flood of new supply hitting the market. We all know what happened the last time there was a major disagreement within OPEC+. Saudi Arabia opened the floodgates to punish Russia and the oil price tanked.

That’s the last thing investors in ASX energy shares want to see again.

The post ASX energy shares in hotseat as OPEC+ struggles to contain crisis appeared first on The Motley Fool Australia.

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Motley Fool contributor Brendon Lau owns shares of Santos Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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