From a purely fundamental perspective, an expected increase in OPEC+ supply is bearish for crude oil, said Ryan Fitzmaurice, commodities strategist at Rabobank.
Crude has rallied nearly 50% this year as economies across the globe reopen and demand returns. Citigroup Inc. said the oil market is expected to be tight in the near-term and should push Brent prices into the mid-$80s, despite any compromise supply deal between the UAE and OPEC+.
The Organization of Petroleum Exporting Countries published its first detailed assessment of 2022, in which it forecast that global oil demand will steadily recover to surpass pre-pandemic levels in the second half of next year. However, it also pointed to a lull in the first quarter.
- West Texas Intermediate for August fell 83 cents to $72.30 a barrel at 1:17 p.m. on the New York Mercantile Exchange.
- Brent for September settlement slid 71 cents to $74.05 a barrel on the ICE Futures Europe exchange.
WTI’s prompt timespread has fallen to about half of levels seen at the beginning of July as U.S. government data shows domestic crude production is rising. The spread’s backwardation — indicating tighter supplies — is fading with output currently at the highest since May 2020. Currently, the August U.S. oil futures is trading at the smallest premium to the September contract in four weeks.
Meanwhile, Saudi Arabia and the UAE appear to be closing in on an agreement to revise Abu Dhabi’s production quota, it would still need to be ratified by the whole group before they can salvage plans to revive halted supply. Goldman Sachs Group Inc. said an accord would be a “bullish catalyst,” and would help remove the low risk of a potential price war.
The two sides haven’t fully resolved their differences and talks are ongoing. There are signs other members of the alliance have been inspired to air their own grievances, with Iraq now seeking a higher baseline for its cuts too.
That said, “the alliance needs to maintain supply management and discipline through next year” if it wants to avoid a potential glut, JPMorgan Chase & Co. analysts including Natasha Kaneva said in a note.
© 2021 Bloomberg L.P.