Oil climbs 2% as OPEC+ considers output hikes, demand surges
Crude prices rose to their highest levels since 2018 on reports that OPEC+ had reached a tentative agreement to hike oil output, but the deal now hangs in the balance after word came late Thursday that a key member objected to it.
OPEC+'s plan to ease output cuts was thrown in jeopardy on Thursday and the pact's meeting pushed to Friday after a key member - the United Arab Emirates - blocked the deal [File: Andrey Rudakov/Bloomberg]
Oil prices continued to climb on Thursday as press reports suggested that OPEC+ is considering a two-million-barrel-per-day (bpd) output hike from August through December – but the deal was thrown into disarray after the United Arab Emirates blocked a plan for an easing of cuts and their extension to the end of 2022.
Global benchmark Brent settled at $75.84 a barrel, up $1.22, or 1.6 percent while United States West Texas Intermediate (WTI) crude gained $1.76, or 2.4 percent, to settle at $75.23 a barrel.
During the session, both Brent and WTI reached their highest levels since October 2018.
OPEC+ ministers met on Thursday via video conference to consider a monthly increase of below 500,000 bpd, according to press reports.
“If OPEC+ does keep a conservative stance and increases its production in a cautious manner – and up to 500,000 bpd is definitely cautious – prices will be supported, as demand will easily absorb that,” Rystad Energy’s Oil Markets Analyst Louise Dickson wrote in a Thursday note.
The Organization of the Petroleum Exporting Countries and its allies, a grouping known as OPEC+, discussed loosening the taps to allow more barrels into the market as demand continues to recover after being plundered by the coronavirus pandemic last year.
According to a report from Reuters news agency, OPEC+ ministers agreed to delay their meeting to Friday after the United Arab Emirates expressed reservations about extending supply cuts past the current cut-off of April 2022, to the end of next year.
Demand for crude is expected to surge in upcoming months as economies reopen and people hit the road during the popular travel season.
According to Rystad Energy, the world could see a demand hike of more than 3 million bpd by the end of September.
“Rystad’s supply-demand balances indicate that in August 2021, there is a call on OPEC+ to produce an extra 1.6 million bpd to keep the market in equilibrium,” Dickson said.
Thursday’s OPEC+ meeting is the latest test of whether OPEC+ wants to continue pushing up prices by staying behind the demand curve, or whether $75 per barrel is sufficient enough, she added. There is, however, some risk that any announcement above 500,000 bpd could swing the scale to the bearish side for oil prices once the dust settles.
OPEC+ agreed to cut output by 9.7 million bpd in May 2020 after the oil market crashed to subzero prices when the coronavirus outbreak brought the global economy to a screeching halt. Cuts now stand at around 5.8 million bpd.
The alliance, led by Saudi Arabia and Russia, helped tighten supply and lift prices.
Russia leads countries that agree with producing more at a lower price since Russia’s breakeven price – the price a country needs to sell a barrel to fund its state budget and balance its books – is much lower than Saudi Arabia’s.
Riyadh has continued to push its preference for cautiously loosening supply to maintain higher oil prices.
“Given Saudi caution on production levels, I would guess that production increases will be gradual over the rest of the year,” Gregory Gause, head of the International Affairs Department at Texas A&M University, told Al Jazeera. “The market certainly thinks that the OPEC+ meeting will not unleash a huge amount of supply.”
“What OPEC+ doesn’t want is to get too far ahead of the curve and release too much supply too soon and have to backtrack and shut in production in the usually lower-demand ‘shoulder’ season, which peaks in October,” Dickson told Al Jazeera.
In a pre-pandemic world, the season of lower demand would be the main concern for producers.
But the emergence of the Delta variant promises to keep the COVID-19 recovery uneven even if demand bounces. Many countries, particularly in the Asia-Pacific region, have yet to lift travel restrictions.
While demand for petrol has recovered nicely and could touch pre-pandemic levels in 2021, the need for jet fuel is still under immense pressure. International travel policies remain inconsistent, with some analysts saying that aviation may not fully recover until the end of 2022 or even 2023.
“The big downside risk continues to be recovery from the pandemic, which looks to be not as smooth in many places as everyone hoped,” Gause said.