Read for 5 minutes (The author, a Reuters columnist, expresses his or her own thoughts.) 5 JULY, LAUNCESTON, AUSTRALIA (Reuters) – The OPEC+ group of oil producers is battling to achieve an agreement on how much additional crude to supply the market, but even if a deal is reached, prices are certain to fall. Last Monday, the group agreed to increase production by 2 million barrels per day (bpd) from August to December. The United Arab Emirates (UAE) desired adjustments that would allow it to expand its output by a bigger amount, therefore the agreement was not ratified. The market has largely viewed OPEC+, which includes the Organization of Petroleum Exporting Countries (OPEC) and allies such as Russia, as successful in stabilizing oil prices following the coronavirus pandemic’s hit to fuel demand, and then boosting them to their highest level in almost three years. Disagreements among group members have been unusual, but not unheard of. In April 2020, a pricing war erupted between leading members Saudi Arabia and Russia, which pushed global benchmark Brent futures to their lowest level in two decades at one time. The current issue revolves around the UAE’s attempt to modify the baseline used to determine its output limit from 3.168 million bpd in the 2020 accord to 3.84 million bpd. In effect, this would allow the UAE to expand its own output by 672,000 bpd above and above its part of the total OPEC+ output target of 2 million bpd by December. On Monday, OPEC+ will continue negotiations. If history is any indication, some type of agreement will be reached between the various groups. It’s unclear what form that compromise would take, but it’s almost probable that it will include more barrels than the anticipated 400,000 bpd per month from August through December. The question for market participants is whether they feel the ongoing recovery in demand is strong enough to offset the probable increase of barrels from OPEC+ and other producers looking to profit from the present price spike. Goldman Sachs is one notable bull: in a June 29 study, the investment bank predicted a 2.2 million bpd increase in demand by the end of the year, leaving the market with a 5 million bpd shortfall. This, of course, excludes the additional 2 million barrels per day proposed by OPEC+ last week, as well as any more compromise barrels that the UAE might be able to secure. However, in Goldman’s forecast, there is still a significant supply shortage, implying that prices may continue to rise. The epidemic is a ‘known unknown,’ especially in Asia, the world’s top oil-importing region, where demand growth has been lukewarm so far this year due to persistent lockdowns and an apparent loss of inventory building by China, the world’s largest crude consumer. Refinitiv estimates Asia’s imports in June at 24.24 million bpd. This is up from May’s 23.04 million bpd, but still falls short of April’s 24.54 million bpd and March’s 24.79 million bpd. In a broader sense, the current picture doesn’t exactly scream a tremendous increase in demand. Total world imports of 1.858 billion barrels, or 61.9 million barrels per day, were reported by commodities researchers Kpler in June, down from 1.947 billion barrels in May and also below the three-month moving average of 1.906 billion barrels. There does not appear to be a physical scarcity of crude, as global stockpiles remain above long-term averages. The current price surge looks to be mostly driven by investors and tied to a larger favorable commodity theme. Brent has risen 48% this year and was trading at $76.02 per barrel in early Asian trade on Monday. However, for the previous two weeks, the contract has been trapped in a very narrow range around $74-$76 per barrel. It’s possible that the market will conclude that whatever the final OPEC+ agreement is, it will be sufficient to halt the rally – at least for the time being. Kenneth Maxwell did the editing./n
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