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

Oil rig
  • 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 surges 5% following reports OPEC+ will extend production cuts through April

oil texas
Workers extract oil from wells in the Permian Basin in Midland, Texas.

  • Oil prices surged by more than 5% after OPEC and its allies reportedly agreed to keep output levels steady. 
  • Saudi Arabia committed to sticking with a voluntary oil supply cut of 1 million barrels per day.
  • The supply decision by OPEC+ is “incredibly bullish” for the oil market, says one analyst.  
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Oil prices soared Thursday in the wake of reports that major oil producers have agreed to keep their supply cuts intact through next month.

OPEC and its allies had been discussing whether or not to restore as much as 1.5 million barrels a day of oil production. The group ultimately decided that it will leave output at current levels, according to a Bloomberg report

Saudi Arabia, meanwhile, committed to extend its voluntary cut of 1 million barrels of oil per day. The oil market officials meet via video-conference. The discussion took place at a time when recovery in the oil market is still taking hold after a plunge in demand because of the COVID-19 pandemic. 

Prices for Brent crude, the international benchmark, jumped as much as 5.3% to an intraday high of $67.47, with the gain later trimmed to 4.7%.

The decision by OPEC+ was “incredibly bullish,” and Saudi Arabia’s decision “was shocking as it leaves them vulnerable to losing market share next month when the oil market is in deficit by a couple million barrels,” said Edward Moya, senior market analyst at Oanda, in a note.

West Texas Intermediate oil futures also popped up as much as 5.3% to an intraday high of $64.51. The continuous contract was later up by 4.6%.

The Energy Select Sector SPDR exchange-traded fund climbed 3.8% and the United States Oil Fund, a popular oil ETF, moved up 6%.

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