Updated: July 2, 2021 9:17:53 am
Oil held its overnight gains in Asia after infighting within OPEC+ delayed a much-anticipated decision on output levels, risking an inflationary spike in prices if the group can’t come to an agreement.
Futures in New York traded above $75 after jumping 2.4% on Thursday. The alliance was forced to postpone its decision on monthly production after the United Arab Emirates blocked a deal at the last minute. The standoff could ultimately lead to OPEC+ not increasing output at all, according to a delegate, which would mean the cartel would fall back on existing terms that call for production to remain unchanged until April 2022.
Prior to the meeting breaking down, the alliance appeared to have an agreement in principle to boost output by 400,000 barrels a day each month from August through December. OPEC+ ministers will reconvene on Friday as the dramatic turn of events leaves the market in limbo and tarnishes the cartel’s carefully reconstructed reputation, following last year’s destructive Saudi Arabian-Russian price war.
If OPEC+ can’t reach an agreement, it raises the possibility that crude will surge higher and add to mounting inflationary pressures in the global economy. Oil had just finished its best half since 2009 as the rapid rebound in energy demand in major economies outpaced the supply response. Citigroup Inc. said in a note before the standoff that it expects the market to remain in a deep deficit this quarter even after accounting for a rise in output from OPEC+.
“Another OPEC+ implosion like last April is unlikely,” said Vandana Hari, founder of oil consultancy Vanda Insights. “They have worked too hard over the past year to ditch the pact in a huff at this stage. I expect the tentative deal between Saudi Arabia and Russia to go through, but some sort of concession may be made to the UAE.”
Along the oil futures curve, the market structure strengthened and timespreads moved deeper into backwardation. The three nearest timespreads on the WTI curve hit $1 a barrel or more on Thursday, an indicator that the market is growing increasingly worried about supply tightness, particularly at the key storage hub of Cushing, Oklahoma, where U.S. crude futures are priced. Brent’s September contract, meanwhile, was 91 cents a barrel more expensive than the October one, compared with 80 cents a week ago.
The UAE said it would only give its support to a deal if the baseline for its own cuts was raised considerably, delegates said, asking not to be named because the talks were private. The nation’s reductions are measured from a starting point in 2018, which set its maximum capacity at 3.168 million barrels a day. But expansion projects have since raised that number to about 4 million barrels a day. Reflecting that new capacity in its baseline could allow it to pump hundreds of thousands of barrels a day of extra crude.
OPEC+ is likely to agree on Friday to restore more production, Neil Beveridge, a senior analyst at Sanford C Bernstein in Hong Kong, said in a Bloomberg TV interview. “We would expect a 400,000 barrels a day increase per month through the rest of this year just to keep the markets balanced,” he said. Brent is likely to exceed $80 a barrel soon, Beveridge said.
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