Oil gives up gains amid Opec+ uncertainty

Crude benchmarks gained nearly 6% over the last four weeks, narrowing their spread amid a tightened market outlook

The sun sets behind an oil rig seen from Monahans Sandhills State Park in Monahans, Texas, U.S., on Tuesday, June 19, 2018. In the West Texas plains, frack-sand mines suddenly seem to be popping up everywhere. Twelve months ago, none of them existed - together, these mines will ship some 22 million tons of sand this year to shale drillers in the Permian Basin, the hottest oil patch on Earth. Photographer: Callaghan O'Hare/Bloomberg
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Oil prices levelled their gains last week, rounding the week 0.8 per cent lower amid uncertainty over when Opec+ will reconvene to decide output increases.

Brent, the international benchmark, settled 1.93 per cent higher at $75.55 per barrel on Friday, while West Texas Intermediate closed up 2.22 per cent at $74.56 per barrel. The benchmarks have gained nearly 6 per cent over the past four weeks, narrowing their spread amid a tightened market outlook.

Opec+, the exporters' group headed by Saudi Arabia and Russia, deferred a planned ministerial meeting three times earlier this month.

The group has not been able to come together to finalise a deal to bring 2 million barrels per day back to the market by the end of the year.

The UAE, Opec's third-biggest producer, has called on the group to revise an outdated baseline measurement. The joint ministerial monitoring committee of Opec+ is currently reviewing Abu Dhabi's request for a fairer baseline assessment.

The UAE has said that the current baseline used to calculate its production quotas within Opec+ is not reflective of its actual production capacity. The UAE plans to raise its production capacity to 5 million bpd by 2030 and has made significant investments to expand its upstream resources. The country has called on fellow producers to consider its baseline from April 2020, as opposed to the metric being used that dates back to October 2018.

According to estimates, the discrepancy between the baseline used to calculate the UAE's quota under Opec+ and its current production capacity is 18 per cent – the highest among the producers within the group.

The UAE also wants the group to “decouple” output restrictions from plans to extend the agreement beyond April 2022.

“If the current Opec+ discord and attempts at price stoking continue, a post-summer correction would follow, and potentially set the stage for an even more bearish 2022 price environment,” said Louise Dickson, oil markets analyst at Rystad Energy.

“Collectively, Opec+ group has about 8.7 million bpd of crude production that could theoretically be activated and produced within just months,” she added.

The group's spare capacity – with the exception of Iran, Venezuela and Libya, which are currently exempt from cuts – stands at 6.7 million bpd.

“Much of this spare capacity is commercially incentivising at more than $70 per barrel,” said Ms Dickson.

A no-deal among Opec+ producers will allow the current restriction to roll over into August, leaving the market further tightened.

Higher oil prices, which made multi-year gains this month as WTI rose above $75 per barrel for the first time since 2014, will also incentivise producers outside the group, particularly in the US shale basins.

In the current deadlocked scenario, oil prices are poised for further gains, with Brent expected to touch $80 per barrel, according to Swiss bank UBS.

“Opec+ output policies have been the main driving force behind the oil price recovery in 2020-21, after a sharp decline in demand in March 2020 and a short period of unilateral decisions on production volumes taken by key alliance members,” Fitch said in a note on Friday.

So far this year, Brent and WTI have gained 45.8 per cent and 53.6 per cent as developed economies ease Covid-19 lockdown restrictions amid widespread vaccination efforts.

The relaxation of Covid-19 rules, notably in the UK, coincides with the summer travel season, which typically sees higher demand for energy.

The markets would need additional supply to meet the demand for crude as commuters take to roads and airlines fly travellers to summer destinations.

However, Opec+ is also navigating an evolving demand scenario as the highly transmissible Delta variant of coronavirus outpaces vaccination efforts.

“The base case scenario is that Opec countries will work out a solution and prevent oil prices from falling free[ly]," said Ipek Ozkardeskaya, senior analyst at Swissquote.

“Therefore, oil bulls will likely remain in charge above the $70 mark, but we will hardly see US crude surpassing the $80 mark until there is more certainty on the Covid news front,” she added.

Updated: July 10, 2021, 2:39 PM