(Updates with WTI settlement)
By Barani Krishnan
Investing.com – OPEC’s disunity could undo oil’s near-perfect rally.
Crude prices tanked for a second day in a row, falling as much as 2% to extend the near 4% drop in the previous session, on worries that more countries that are members or allies to the Organization of the Petroleum Exporting Countries will overproduce after Saudi Arabia and the UAE — who dominate the cartel — failed to agree on August export quotas.
New York-traded West Texas Intermediate crude, the benchmark for U.S. oil, settled down $1.17, or 1.6%, at $72.20 a barrel. WTI lost 3.8% on Tuesday for its sharpest one-day loss in three weeks.
London-traded Brent, the global benchmark for oil, was down $1.26, or 1.7%, to $73.27 by 2:47 PM ET (18:47 GMT). Brent lost 3.4% in the previous session.
Until last week’s meeting of the 13-member Saudi led-OPEC and its 10 Russian-steered allies — collectively known as OPEC+ — oil had a near-perfect rally, with WTI up 57% on the year and Brent up almost 50%.
But the fallout between one-time staunch OPEC members the Saudis and the Emiratis was threatening to undo the discipline and cohesiveness of the larger 23-member OPEC+ alliance that had succeeded in bringing oil prices from pandemic lows of minus $40 per barrel for WTI to current seven-year highs through production cuts.
“It is unrealistic to think that failing to agree on output levels from August onwards would mean that output remains unchanged, particularly when you consider that the reason there is a disagreement is that the UAE wants to increase its baseline if the deal is extended beyond April 2022,” said analysts at ING, in a note.
“There is still likely to be plenty of noise around what OPEC+ may do in the coming weeks, and so that means volatility is likely to remain.”
OPEC+ was supposed to have agreed on a hike of at least 400,000 barrels per day for August.
The Saudis had proposed that OPEC+ raise output in stages to a net of 2 million barrels daily between August and December. They also suggested extending withholding the full production capacity of all OPEC+ members till the end of next year instead of April 2022, without an adjustment to baseline production levels.
The United Arab Emirates, however, was unhappy about the baseline from which their production cuts were calculated, arguing that the level, set at the height of last year’s pandemic, was too low. Abu Dhabi has invested billions of dollars since to increase its production capacity and wants to pump more to make good on that money.
UAE oil production hit a record of more than 4 million barrels a day in April last year during a brief supply war between Saudi Arabia and Russia. Prior to that, the country had only ever pumped more than 3.2 million barrels a day for a whole month twice — in November and December 2018.
Crude prices initially spiked on Monday when news spilled out there would be no output hikes for August as any further squeeze of oil supplies in a global economy recovering from the coronavirus pandemic was seen as bullish.
And although the absence of an OPEC+ deal initially seemed good for the market, traders eventually sensed that there was nothing to bind those in the alliance to tight production limits.
“The risk of a no deal raising noncompliance, White House urging a compromise, a rapid spreading virus variant, and a very overbought market all helped trigger the correction which was then fed some additional fuel from a stronger dollar,” Saxo Bank said, referring to the Biden administration’s concerns about OPEC’s behavior which was fueling huge US inflation from oil.
“While the longer-term outlook looks bullish, short-term uncertainties may lead to increased volatility, not least considering the time of year where summer vacations swing into full gear, thereby removing liquidity from absent traders,” Saxo Bank’s strategy team said.
Traders will also be on the lookout for data on weekly U.S. oil inventories due after Wednesday’s market settlements for WTI and Brent.
The data, due from the American Petroleum Institute at 4:30 PM ET (20:30 GMT), will come before Thursday’s official inventory update for the week ended July 2 by the Energy Information Administration.
According to a consensus of analysts tracked by Investing.com, U.S. crude crude stockpiles likely fell by 4.03 million barrels last week, after the drop of 6.72 million in the previous week.
Gasoline inventories likely fell by 2.2 million barrels versus the rise of 1.52 million in the prior week, consensus shows.