KSA, UAE reach compromise on supply, as oil dips on China’s crude imports

July 14, 2021

DUBAI/LONDON/OSLO — Saudi Arabia and the United Arab Emirates have reached a compromise over OPEC+ policy, a source said on Wednesday, in a move that should bring about a deal to supply more crude to a tight oil market and cool soaring prices.

Brent oil prices fell on the news by as much as $1 per barrel towards $75 per barrel after Reuters reported the two major OPEC producers had agreed a deal.

Another reason oil prices are trading lower Wednesday is that the market, despite the recent bullish signals, started realizing there is some reluctance from the buy-side to support the current high price levels, said Rystad Energy’s Oil Markets Analyst Louise Dickson.

Traders started realizing that oil might be getting too expensive for too long after China’s half year crude imports were reported to have fallen by 3% against the same time in 2020.

As China is the world’s top crude oil importer, a decline in imports, especially since it is the first one since many years, is a significant price signal for the market to step on the brake pedal.

High oil prices were not the only variable affecting China’s imports, as maintenance weighed in too, but definitely one that contributed to the fall.

Meanwhile, in a statement on Wednesday, the UAE Energy Ministry said that a deal with OPEC+ on its baseline is yet to be reached and that deliberations are continuing.

The Organization of the Petroleum Exporting Countries (OPEC), Russia and their allies, a group known as OPEC+, still need to take a final decision on output policy, after talks this month were abandoned.

OPEC+ had agreed record output cuts of almost 10 million barrels per day (bpd) last year to cope with a pandemic-induced slump in demand. The curbs have been gradually relaxed since then and now stand at about 5.8 million bpd.

The dispute between Riyadh and Abu Dhabi spilled into the open after the OPEC+ talks, with both airing concerns about details of a proposed deal that would have added an extra 2 million bpd to the market to ease oil prices that have recently climbed to 2-1/2 year highs.

While Saudi Arabia and the UAE both endorsed raising output immediately, the UAE had opposed extending the existing deal until December 2022 from April 2022 unless it was granted a higher production quota.

The OPEC+ source said Riyadh had agreed to Abu Dhabi's request to have UAE's baseline — the level from which cuts under the OPEC+ agreement on supply curbs are calculated — set at 3.65 million bpd from April 2022, up from 3.168 million now.

Giving the UAE a higher production baseline paves the way for extending the overall pact to the end of 2022, the OPEC+ source told Reuters.

In other developments, Chinese data raised some eyebrows Wednesday but in the other side of the Pacific, oil demand in the US is booming.

The market expects a tenth consecutive week in US crude inventory draws, while the IEA report warns of a “significant tightening” of the oil market if OPEC+ doesn’t raise production.

The bearish factor of US inflation accelerating to 5.4% in June y/y has raised the possibility of the Fed enacting an interest rate hike sooner than expected, but so far hasn’t materially weighed on prices.

A stronger dollar however, sooner or later, will put downward pressure on the price of the barrel.

Potential demand destruction from the Delta variant is also being somewhat shrugged off for now, as the damage is mostly contained to Asia, but the highly contagious variant is penetrating into Europe and is already derailing reopening plans, which carries near-term downside risk.

Meanwhile, OPEC+ has not yet definitively signaled whether it will step in and meet the anticipated demand boost.

There is enough spare capacity within OPEC+ to meet the crude demand increase to year-end and return the market to equilibrium, cooling down the risk of an overtight and overheated market.

With more than 8 million bpd of spare capacity, 2 million bpd of which is in Saudi Arabia, there is room for maneuvering. So far, the alliance has managed to create an artificially tight crude balance throughout 2021 by staying “behind” the demand curve.

We expect continued bouts of price volatility throughout the summer months in the run-up to a very bullish forecasted 1.5 million bpd implied crude stock draw for August 2021 and then a subsequent dip when the shoulder demand slump season hits in October 2021. — Agencies

July 14, 2021
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