Oil holds above $75 as investors weigh OPEC+ deadlock with fresh talks ahead

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Oil futures held above $75 a barrel on Monday morning, as markets wait to see whether OPEC+ talks today can resolve the deadlock on an output deal driven by a clash between the United Arab Emirates and Saudi Arabia.

The OPEC+ group of major oil-producing countries failed last week to come to agreement on output quotas for 2021 and on extending the underlying internal supply deal by seven months, to December 2022. A fresh round of talks is due on Monday.

Brent crude futures were last up 0.24% at 4:45 am E.T., trading at $76.37 per barrel. WTI futures on Globex were up 0.23% at $75.32.

Saudi Arabia and Russia are pushing for a slow increase of 400,000 barrels a day each month for the rest of 2021, which most OPEC+ members back. The snag came with the extension to the deal that denotes how much oil each country contributes to overall supply from the group. The UAE refused to accept the extension without an adjustment to its contribution quota, which it sees as out of line with its output capacity and unfair compared with Saudi Arabia’s arrangement.

Should the deadlock in OPEC+ not be resolved, then the July ouput agreement could automatically run throughout August by default, said Kevin Solomon, energy economics analyst at StoneX.

“This would be troubling scenario for the global economy; the oil market would tighten at an even faster rate and prices could quickly exceed $80/bbl, which would hamper the global economic growth prospects through inflationary pressures,” Solomon said in a note.

Demand for oil is likely to rise as a result of the easing of pandemic restrictions, so the restrictions on supply could cause prices to skyrocket, he said. Ensuing price rises could in turn slow down global economic recovery.

Alternatively, OPEC+ could break apart over the deadlock. That would likely flood the oil market with supply as producers rushed to take advantage of a lack of quotas, some analysts say. In that scenario, prices would slump as supply outstripped demand.

With futures at their current level, the likelihood is for OPEC+ to find a way to resolve the impasse, Bjarne Schieldrop, commodities chief analyst at SEB said.

“However, with a Brent crude oil price of USD 76/bl the current oil market is too much of a joy to ruin by not finding a solution. We thus think that there will be some kind of compromise in the end where both Saudi Arabia, Russia and the UAE all get a little bit of what they want. But it could certainly drag on for several more days before a deal is reached,” Schieldrop said in a note.

This report has been updated to correct the figure for the proposed output increase.

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Global oil demand to return to pre-pandemic levels next year, although COVID hotspots will make the recovery uneven: IEA

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  • Global oil demand is set to return to pre-pandemic levels in 2022, the International Energy Agency said.
  • COVID will keep impacting demand due to continued outbreaks, unequal vaccination levels and societal shifts.
  • Accelerating production in the US and OPEC+ countries will boost supply in 2022, the IEA said.
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Global oil demand is set to return to pre-pandemic levels by the end of 2022, but renewed COVID outbreaks and low vaccination levels in developing countries will make the recovery uneven, the International Energy Agency said on Friday.

The IEA issued its first forecast for 2022 in its monthly oil report, predicting that demand would build on 2021’s growth of 5.4 million barrels per day and increase by an additional 3.1 million barrels per day in 2022, reaching 100.6 million barrels per day by the end of next year.

Recovery will however be uneven as COVID-19 continues to affect non-OECD countries with slower vaccination rates and the pandemic caused shifts in consumer behaviour.

“Continued teleworking in OECD countries […], higher electric vehicle sales and increased car efficiencies for new models will weigh on growth.” the IEA believes, adding that ongoing border closures will also keep impacting fuel orders. They had slowed down significantly during the pandemic and associated lockdowns that prevented international and domestic travel.

Jet fuel and kerosene demand are therefore still expected to be 11% lower at the end of 2022 compared to before the pandemic. At the same time, LPG and ethane demand will rise around 5% above pre-pandemic levels and gasoline and diesel orders will rebound to their former standards.

The IEA left its outlook for 2021 demand mostly unchanged from last month. The more stable COVID-19 situation and continued recovery and economic reopening in OECD countries caused demand to rise in the first half of the year. However, slow vaccination rates in non-OECD countries led the IEA to reduce forecasts for the second half of the year.

Overall 2021 demand expectations were therefore lowered to 50,000 barrels per day, with annual growth now expected to be around 96.4 million barrels per day.

Global oil supply is set to grow more quickly in 2022, as the US is set to recover from two consecutive years of production declines and will account for much of the increase in supply from outside OPEC+. The IEA predicts non-OPEC countries will supply around 1.6 million barrels per day more next year, leaving OPEC+ to produce an additional 1.4 million barrels per day to meet growing demand.

“The boost in non-OPEC+ oil supply next year comes despite financial constraints and mounting pressure from climate activists and shareholders on major oil companies and independents,” the report said.

In the shorter term, the IEA said OPEC+ may have to revise its current supply policies in the second half of 2021, as disparities between demand and supply start developing and are set to affect markets in the last quarter especially.

Finally, sanctions on Iranian oil exports will also play a role in increased supply. If Tehran can strike a deal with global powers over its nuclear activities and sanctions are lifted, Iranian crude could flood markets and make the country the biggest driver of supply growth in 2022, the agency said.

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Oil stocks gain after OPEC production plans signal bullish outlook for global demand

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  • Shares of companies tied to the oil sector rose after OPEC + agreed to gradually ease production cuts, signaling a bullish outlook for global demand.
  • The energy sector fund XLE rose 3%, while some oil exploration & production companies rose as much as 12%.
  • Oil prices also neared two-year highs on Tuesday.
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Shares of companies tied to the oil industry rose on Tuesday after OPEC+ agreed to gradually ease production cuts and Saudia Arabia’s energy minister signaled a bullish tone about the global recovery.

At a meeting on Tuesday, the group confirmed its plan to continue to raise production only gradually over the coming two months, implying no change in their current policy.

“The demand picture has shown clear signs of improvement,” Saudi Energy Minister Prince Abdulaziz bin Salman said at the meeting, according to Bloomberg News.

The news that supply will only rise slowly pushed the Energy Select Sector SPDR Fund (XLE) over 3% Tuesday. Exxon Mobil rose as much as 3.9%. Exploration and production companies climbed, with Marathon Oil Corporation and Devon Energy Corporation both climbing over 12%. Pioneer Natural Resources gained 5%.

The energy sector has outperformed the S&P 500 and is the best performing sector in the last month and in all of 2021. XLE is up about 42.4% year-to-date, compared to the S&P 500’s gain of nearly 12%.

Bullish news from OPEC+ also lifted oil prices near two-year highs on Tuesday. Brent crude was trading around $70.17 per barrel at 12:51 p.m. E.T. Tuesday was the first time prices have risen above the $70 mark since March.

OPEC and its non-OPEC partners agreed to stick to the plan first made in April, where 2.1 million barrels per day of supply will be brought back to the market by July, Bloomberg said.

Fundstrat’s Tom Lee said the energy sector is his top sector pick, and one that is a “contrarian” group given widespread skepticism from Wall Street.

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