Disagreement within OPEC could spark a more volatile period for oil, with prices skyrocketing due to a lack of new supplies or suddenly falling if member countries decide to independently release crude.
Oil prices initially rose to a six-year high when it became known that the Organization of Petroleum Exporting Countries and its allies, known as OPEC +, ended their meeting on Monday without further action and without a new meeting date. A plan proposed by OPEC, Russia and other allies to bring 400,000 barrels back to market a day has been thwarted by the UAE’s objection to other aspects of the deal.
West Texas Intermediate’s crude oil futures for August traded as high as $ 76.98 on Tuesday before settling at 2.4% at $ 74.53 a barrel. Many analysts had expected oil to rise due to disagreement among OPEC members, saying prices could still rise despite the sell-off.
“It gets worse before it gets better. I still think $ 85 to 90 a barrel should be the high end,” said John Kilduff, partner at Again Capital. “You will see more oil being produced. You will not go insane, but you will not live in the current structures. Russia will take the lead.”
“It could be free for everyone,” he said.
Some analysts had already expected oil spikes in the region of USD 100 per barrel over the course of the next year. The feud between Saudi Arabia and the United Arab Emirates opens a new rift in OPEC, which means it could now refuel if members decide to open the cones.
“Realistically, I don’t think anyone wants to go this route. I suspect that cooler heads or rational thinking will prevail,” said Bart Melek, global head of commodity strategy at TD Securities. Melek said there are some wild cards for OPEC that could affect prices. An important question is whether the US and Iran will come to an agreement on Iranian nuclear programming that will allow it to return more than 1 million barrels a day to the market.
Another risk is whether the variants of the Covid virus could affect economic recovery and dampen demand for travel.
OPEC and its partners were able to agree to return 400,000 barrels a day to the market starting in August. But the United Arab Emirates also aimed to increase their production base from 3.1 million barrels a day to 3.8 million barrels a day, and that was the sticking point with Saudi Arabia.
After three days of meetings, there was also a dead end on whether the deal would include an extension of the plan until the end of 2022, which the UAE rejected. Without an agreement, 5.8 million barrels a day, which were cut from production last year, will remain off the market even if demand increases.
“I think OPEC’s event risk is back. We had a pretty smooth process this year and now that hasn’t been factored in at all,” said Helima Croft, global head of commodity strategy at RBC Capital Markets. “Once people start focusing on 5.8 million barrels off the market, they’ll likely get nervous. How they get back will be important.” The market will be affected in very different ways, depending on whether the oil trickles back or the producing countries flood the market with offers.
The tensions between Saudi Arabia and the United Arab Emirates, formerly strong allies of OPEC, come at a time when the market increasingly needs more supply. Analysts believe the world has less than 2 million barrels a day due to current levels of production and increasing demand. That means oil is being taken out of storage and price pressures could increase as the economy recovers and demand increases.
The US produces about 2 million barrels less a day than it did before Covid, and production has remained constant even as prices have risen. US industry has become more disciplined due to demands from shareholders and lenders. Oil companies are also faced with sustainability requirements and the pressure to reduce carbon.
But US drills have the capacity to increase the drilling. “Of course, $ 90 worth of oil would produce a lot of wells not only in Perm, but also in the Bakken and Rocky Mountains,” said Andy Lipow, President of Lipow Oil Associates. “I think when prices go up that is one of the things [OPEC+ members] are concerned is a surge that would encourage many drilling in other parts of the world. “
Lipow said OPEC will be cautious even with falling prices and the potential for even lower levels. “If prices drop $ 5 a barrel, they will come to an agreement to signal the market that they are not flooding it with supplies,” he added.
It also comes as gasoline prices continue to rise and are nearly $ 1 a gallon higher than they were at that time last year. The national average for unleaded gasoline was $ 3.13 per unleaded gasoline on Tuesday, after a weekend when gas pump prices for the July 4th holiday were their highest in seven years, according to the AAA. If crude oil prices keep rising, so will gasoline prices.
“I think gasoline prices could stay above $ 3 a gallon for the remainder of the summer,” said Lipow.
The White House said Tuesday there had been a series of high-level talks with officials in Saudi Arabia, the United Arab Emirates and other partners.
“If prices went up, I think it would be more of a catalyst for the White House to get involved,” said Croft. “When you have a sell-out, you may have people in the administration saying why I need to be involved.”
Kilduff said he doesn’t think the situation will last long. “I think we’re in the final innings right now. I’m aiming for gasoline demand to fall in mid-August as the kids go back to school. The refineries will start calling back.” ,” he said.