Oil hits 3-year high after OPEC+ abandons their meeting, meaning supply could tighten even further

A woman holds a pump nozzle in her hand at a gas station and refuels a car.
  • Oil prices hit a three-year high after OPEC+ abandoned their meeting on Monday.
  • Prices jumped because the lack of a deal brings the market closer to an August without extra barrels from the alliance, an analyst said.
  • Oil prices have risen 50% since the start of the year as countries begin to recover from the COVID-19 crisis.
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Oil prices jumped to their highest in three years on Tuesday after OPEC and its allies abandoned talks on Monday without setting a new date for the next meeting.

Ministers had been set to resume talks on Monday after failing to reach a deal on raising oil production last week, with the United Arab Emirates rejecting a proposed eight-month extension to output curbs. Now that no deal to boost production has been reached, it could signal tighter supply and rising prices.

Brent crude futures rose 0.8% to $77.78 a barrel, trading around their highest since autumn 2018, while West Texas Intermediate rose 2.3% to $76.92 a barrel. This year alone, crude oil has soared by almost 50%.

The current “crisis” within OPEC, which has seen Saudi Arabia and the UAE fail to agree on whether to continue the production cuts agreement, is not entirely unexpected, according to analysts at Commerzbank.

Some OPEC members, including Saudi Arabia, had been hoping to increase production over the coming months. But the UAE refused to agree and sought better terms that would change how its quota is calculated and allow it to produce more, Deutsche Bank strategist Jim Reid said in a note.

Oil prices hit post-pandemic highs after reports that Monday’s meeting had been called off and that the group would continue with quotas at current levels.

Almost at the moment prices begin to rise, the differences between the members increase and production discipline declines, analysts at Commerzbank said.

The “meeting’s postponement brings the market closer to an August without extra barrels from the alliance, and that is why oil prices immediately jumped on the news,” Louise Dickson, oil markets analyst at Rystad Energy, said in a note.

“Postponing the meeting also reveals that the objections that the UAE raised are not easy to brush off,” she added. “It may take some convincing and some serious concessions from Saudi Arabia to reach a deal now, and these should only mean increasing output more than initially suggested going forward – if a deal is to be agreed among OPEC+.”

But one source familiar with the OPEC+ talks told the Financial Times that there is no postponement. “The UAE blocked the decision, so the meeting is cancelled. The current production levels continue as they are,” a person familiar with Saudi Arabia and Russia’s positions told the FT.

The dispute is still leaving the oil market cold, chiefly because supply is currently tight, Commerzbank said. But it will likely to put pressure on prices in the medium term, especially in view of the structural shift away from fossil fuels.

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

Oil pump sunset background

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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