Oil Price Update & Market Outlook
OPEC+ members are meeting Friday to discuss output quotas for August and beyond, but the deal could be thwarted by one member – the UAE. Prices dipped below their 32-month highs as traders turned cautious over a delayed announcement on production levels on Thursday but remain at three-year highs. Brent crude futures fell 0.2% to $75.71 a barrel in early trade on Friday, after hitting a 32-month peak of $76.74 in the previous session.
OPEC+ Production Meeting
The full OPEC+ Ministerial meeting was originally scheduled for late Thursday. Ahead of the meeting, Saudi Arabia, de facto leader of the Organization of the Petroleum Exporting Countries, and top partner Russia reportedly reached a tentative agreement to gradually add 2 million barrels a day to OPEC+’s output via a monthly boost of 400,000 bpd between August and December.
But a Joint Ministerial Monitoring Committee meeting didn’t reach a final recommendation as the United Arab Emirates remained a holdout. The UAE reportedly wants its quota calculated differently so that it can pump more oil.
The UAE typically follows Saudi Arabia’s lead, but has become more vocal in recent meetings and even considered leaving the cartel last year. But if a deal isn’t reached, OPEC+ would likely keep production at current levels, squeezing global supply and sending oil prices even higher.
There is significant room in the oil market to absorb more production as demand will increase in tangent with Covid-19 vaccination rates in the United States and Europe, analysts noted.
OPEC estimates that if output stays the same, current supply will fall short of expected demand by 1.5 million bpd in August and 2.2 million bpd in Q4. Earlier last month the group agreed to lift production by 350,000 barrels per day in June and by 441,000 bpd in July.
Oil markets lost a little direction during Thursday’s trading session after the OPEC+ nations failed to come to a deal on production output and deferred the decision until Friday afternoon.
Benchmark prices jumped more than 2% on Thursday as traders digested media reports that the group was considering a production increase of just 400,000 barrels a day (b/d) over the coming months, less than the 500,000 b/d proposed at the June meeting.
Nymex West Texas Intermediate (WTI) eased 0.1% to $75.15 a barrel, after reaching $76.22 on Thursday – also its highest level since October 2018. If WTI breaks above $76.90 a barrel in the coming sessions, it would be the benchmark’s highest level since November 2014.
U.S. crude edged down 0.3% to $74.98 a barrel, but still up more than 50% so far this year. Brent crude was also down 0.2% to $75.72 per barrel.
The spread between the prices of Brent and WTI is narrowing, with a difference of just 61 cents at the close on Thursday – its lowest in nearly a year. Adam Hoyes at Capital Economics suggested there are three main reasons why the two main pricing mechanisms have begun trading so close, including an absence of pipeline capacity constraints, recovery in US demand asserting upward pressure on WTI, and increased output from OPEC+ putting downward pressure on Brent.
Shares of major oil companies fell, with both Exxon Mobil and Chevron losing about 0.8% in early trade Friday. Meanwhile, top shale stocks Diamondback Energy lost 2.3%, EOG Resources eased 0.6% while Continental Resources slipped 0.8%.
The potential return of Iranian crude to the market has been hanging over oil prices this year. But recently, that prospect has started to fade.
Talks between Iran and Western powers are expected to continue soon to revive the nuclear deal that the U.S. left in 2018. The Joint Comprehensive Plan of Action lifted sanctions on Iranian oil in return for limits on Tehran’s nuclear program. But gaps remain in the talks and Russian officials said that negotiations would not resume early than next week.