Oil commentary - 5 July 2021
Good morning and to all our friends in the USA, Happy 4th of July, for yesterday.?But apparently it doesn't matter if you're a bit late.?Just like the OPEC meeting.?Trilogies are never good.?Saying that I did enjoy the third instalment of Back to the future, so let's hope OPEC manage to achieve the same today, just maybe not a train that needs to go up to 88mph.?Oh, by the wayyyy, it’s coming home.?Anywayyyy, oil??Yes, oil.?Brent is trading this morning at $76.24 up 0.07 and WTi is trading at $75.20 up 0.05.?OK, so here we are, in the highly unusual position of OPEC+ not being able to come to an agreement.?What's the issue I hear you cry??Well, mainly down to the fact that the UAE see no need for the historical output cut agreement, which is due to expire in April 2022, extended until end December 2022.?First, I have to say that I agree with the UAE stance here.?The problem is the baseline quota the UAE have been applied.?What do I mean by that??Well, when the agreement was reached last year, the UAE produced in November and December 2019 around 3.2mnnpd of crude oil.?However, earlier in 2019, the UAE produced closer to 3.8mn bpd.?And this figure of 3.8mn bpd was really closer to consistent output levels.?This has manifested itself into the UAE effectively keeping 35pct of output side-lined, whereas Saudi and Russia are both keeping around 22pct off the market.?This is the problem the group faces.?The return of 400kbpd of production is a no brainer but frankly, not enough to meet the bullish demand forecasts so many are making.?Both of these issues have caused the market to say ok ok ok yeah nah yeah, I get it, yeah, but nah.?But yeah??So, it's nice to be around $75.?Very nice.?The market can deal with that but what happens if there's no deal today??What does an extension in to a fourth day of talks tell the market??Let's bear in mind they are meeting monthly now so will the market perceive this friction could happen next month too??Look one thing is for sure, we will never see the fallout we witnessed between Saudi and Russia in March year again, the group are strong, and I dismiss any rumours about the group breaking up.?But today is key to ensure that integrity remains strong.?Keep your eyes on the headlines.?Good day, and week to all.