OIL GIVES UP GAINS AMID UNCERTAINTY OVER OPEC+ DECISION
▶ Crude benchmarks narrow their spreads as market outlook tightens
Oil prices gave up last week’s gains to round off the week 0.8 per cent lower amid uncertainty over when Opec+ will reconvene to decide output increases.
International benchmark Brent, however, settled 1.93 per cent higher at $75.55 a barrel on Friday while West Texas Intermediate, the gauge that tracks US crudes, was 2.22 per cent up at $74.56 a barrel. The benchmarks have gained about 6 per cent over the past four weeks, narrowing their spread amid a tightened market outlook.
Opec+, which is led by Saudi Arabia and Russia, deferred a planned ministerial meeting three times earlier this month.
The group has not been able to come together to finalise a deal to bring 2 million barrels per day back to the market by the end of the year.
The UAE, Opec’s third-biggest producer, urged the group to revise an outdated baseline measurement. The group’s joint ministerial monitoring committee is reviewing the request.
The Emirates plans to raise its production capacity to 5 million bpd by 2030 and has made significant investments to expand its upstream resources.
It called on fellow producers to consider its baseline from April 2020, as opposed to the yardstick being used that dates back to October 2018.
According to estimates, the discrepancy between the baseline used to calculate the UAE’s quota and its current production capacity is 18 per cent – the highest within the group. The UAE also wants the group to “decouple” output restrictions from plans to extend the agreement beyond April 2022.
“If the current Opec+ discord and attempts at price stoking continue, a post-summer correction would follow and potentially set the stage for an even more bearish 2022 price environment,” said Louise Dickson, an analyst at Rystad Energy. “Collectively, Opec+ group has about 8.7 million bpd of crude production that could theoretically be activated and produced within just months.”
The group’s spare capacity – with the exception of Iran, Venezuela and Libya, which are currently exempt from cuts – stands at 6.7 million bpd.
“Much of this spare capacity is commercially incentivising at more than $70 per barrel,” said Ms Dickson.
A no-deal among Opec+ producers would allow the current restriction to roll over into August, leading to further tightening in the market. Higher oil prices will also incentivise producers outside the group, particularly in US shale basins.
In the current deadlocked scenario, oil prices are poised for further gains, with Brent expected to hit $80 a barrel, according to Swiss bank UBS.
“Opec+ output policies have been the main driving force behind the oil price recovery in 2020 and 2021, after a sharp decline in demand in March 2020 and a short period of unilateral decisions on production volumes taken by key alliance members,” Fitch said on Friday.
Brent and WTI have gained 45.8 per cent and 53.6 per cent this year as developed economies ease Covid-19 lockdown restrictions amid widespread vaccination efforts. The relaxation of curbs coincides with the summer travel season.
However, Opec+ is also dealing with an evolving demand scenario as the spread of the Delta-plus coronavirus strain outpaces vaccination efforts.
“The base-case scenario is that Opec countries will work out a solution and prevent oil prices from falling freely,” said Ipek Ozkardeskaya, a senior analyst at Swissquote.
“Therefore, oil bulls will likely remain in charge above the $70 mark but we will hardly see US crude surpassing the $80 mark until there is more certainty on the Covid news front.”