OPEC discord could bring a new level of volatility in the oil market
Mismatch within OPEC If member states decide to release crude oil themselves, a shortage of new supplies can cause prices to spike or drop sharply, causing a more volatile period for oil.
Oil prices first climbed to their highest level in six years on news that OPEC +, the Organization of the Petroleum Exporting Countries and its allies, ended the meeting on Monday, without action or further news. meeting day. OPEC, Russia and other allies’ plans to put 400,000 barrels a day back on the market have been disrupted by UAE opposition to other aspects of the deal.
West Texas Intermediate crude oil futures in August traded at $ 76.98 on Tuesday, then fell back to $ 74.53 a barrel, down 2.4%. Many analysts expect oil to rise amid discord among OPEC members, and prices could rise further despite the sell-off.
“It’s going to get worse before it gets better, but I think it’s still capped at $ 85-90 a barrel,” said John Kirduff, partner at Again Capital. “You will see more oil produced. They won’t go crazy, but they won’t live in the current structure. Russia will take the lead.
“It could be free for everyone,” he said.
Some analysts were already expecting oil peaks of around $ 100 per barrel over the next year. The conflict between Saudi Arabia and the United Arab Emirates opens a new rift within OPEC. This means that if a member decides to open the cap, oil can also be put in the reservoir.
Bert Merek, Global Head of Commodities Strategy at TD Securities, said: Merek has said that certain OPEC wildcards can affect prices. The main question is whether the United States and Iran will agree on Iran’s nuclear program and allow it to put more than a million barrels a day back on the market.
Another risk is whether variants of the Covid virus may affect the economic recovery and weigh on travel demand.
OPEC and its partners were able to agree to put 400,000 barrels per day on the market from August. However, the UAE was also aiming to increase its benchmark production from 3.1 million barrels per day to 3.8 million barrels. It was Saudi Arabia’s commitment.
After the three-day meeting, there was also a deadlock over whether to include an extension of the plan by the end of 2022 in the deal, which the UAE objected to. Without a deal, 5.8 million barrels per day, cut from last year’s production, will remain out of the market as demand increases.
Helima Croft, Global Head of Commodities Strategy at RBC Capital Markets, said: “I think they can get nervous as people start to focus on 5.8 million barrels of the market. It will be important to know how they come back. Oil drops, producing countries The impact on the market will vary greatly depending on whether or not the market is flooded with supplies.
Frictions between Saudi Arabia and the United Arab Emirates (formerly a strong OPEC ally) arise when the market increasingly needs supplies. Analysts expect the world to run out by more than 2 million barrels a day, based on current production levels and growing demand. This means that the oil is taken out of storage, and as the economy recovers and demand increases, price pressures can increase.
The United States is producing about 2 million barrels per day less than before Covid, and production remains stable as prices rise. The American industry is increasingly disciplined by the demands of shareholders and creditors. Oil companies also face sustainability demands and carbon reduction pressures.
However, American drillers have the option of increasing drilling. “Of course, $ 90 worth of oil will drive a lot of drilling not only in the Permian but also in Bucken and Rocky,” said Andy Lipow, president of Lipow Oil Associates. “As the prices go up, one of them [OPEC+ members] We are concerned about the high spikes that are driving a lot of drilling in other parts of the world. “
Mr. Lipou said OPEC will also pay attention to lower prices and possible lower levels. “If the prices drop by $ 5 a barrel, we will come to an agreement so that the market is not inundated with supplies,” he added.
Gasoline prices continue to rise, nearly $ 1 per gallon more than the same time last year. The national average for unleaded gasoline on Tuesday was $ 3.13 per unleaded gasoline, following the weekend when prices at the pump were the highest in the seven years of Independence Day. According to AAA. As crude oil prices continue to rise, so do gasoline prices.
“I think gasoline prices can exceed $ 3 a gallon for the rest of the summer,” Lipow said.
The White House said on Tuesday it had had numerous high-level conversations with officials from Saudi Arabia, the United Arab Emirates and other partners.
“If the prices go up, I think it’ll involve the White House,” Croft said. “If it is sold, government officials may ask me why I should get involved in this. “
Kirduff said he didn’t expect the situation to last any longer. “I think we’re in the last heat right now. I’m aiming for mid-August. The demand for gasoline will begin to decline as the children return to school. Refiners are starting to call back I will, ”he said.