Wednesday, August 4

Oil price weakness on the horizon: Here’s what analysts are saying about OPEC+ oil deal


The focus will now turn to demand given the immediate uncertainties about supply have disappeared

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OPEC+ has overcome an internal dispute and salvaged a deal to add more barrels to the market, with the group set to boost output by 400,000 barrels a day each month from August until all its halted production has been revived. Brent oil fell toward US$73 a barrel as investors digested the news.

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Oil prices spiked earlier this month after the UAE blocked a deal between the Organization of Petroleum Exporting Countries and its partners to increase production. Abu Dhabi had argued its crude-production quota was set too low, a position rejected by Saudi Arabia.

A compromise was eventually reached — and the two oil ministers made a very public show of how they had patched up their differences at a news conference on Sunday. But the UAE, which last year floated the idea of ​​leaving OPEC, only got about half of what it was demanding, and when the current deal comes up for renewal at the end of next year, more fraught negotiations are likely.

The rift over oil underlined a growing economic rivalry that’s been sharpened by the pandemic, as well as a political divergence with repercussions across the Middle East. While ties are under pressure, there is no sign of a complete breakdown.

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Earlier this week, the de facto ruler of the United Arab Emirates arrived in Saudi Arabia and was greeted by his Saudi counterpart, amid tensions between the two Gulf nations over oil, trade and foreign policy.

Sheikh Mohammed bin Zayed met Mohammed bin Salman on Monday at the Riyadh airport upon arrival, state-run Saudi Press Agency reported. It’s their first public meeting since the countries clashed over oil policy.

The two leaders discussed opportunities to boost bilateral cooperation in various fields as well as regional and global developments, according to SPA. They also discussed recent efforts toward political settlements for crises and challenges in the region.

Saudi Arabia’s crown prince greeted his counterpart as he exited the plane and the two men were shown masked, and in conversation, as they walked through a passenger boarding bridge into a reception area. Saudi and UAE flags were shown flying.

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“During our meeting in Riyadh, my brother Mohammed bin Salman and I discussed ways to further deepen the fraternal bond and strategic cooperation between our nations,” Sheikh Mohammed wrote on his Twitter account. “The partnership between the UAE and Saudi Arabia continues to be strong and prosperous.”

Here’s what some analysts had to say about agreement, which was driven by the United Arab Emirates seeking better terms, and the broader outlook:

Citigroup

The market is very tight and a supply increase of 400,000 barrels a day will turn out to be a pittance, Ed Morse, global head of commodities research at Citigroup Inc., said in a Bloomberg television interview. Demand is significantly higher, despite the Covid -19 pandemic exploding in parts of the world, and oil prices are likely to climb much further by the time summer is over, he said.

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Vanda Insights

The deal proves that OPEC+ is not only very much intact, but also on course to manage a controlled and cautious tapering of cuts to avoid even the slightest risk of tipping the market into oversupply, said Vandana Hari, founder of Vanda Insights in Singapore. Quota -busting is likely to remain a thorn in the side of the alliance, especially when members start experiencing restraint fatigue as markets demand more oil, she added.

Goldman Sachs

Goldman Sachs Group Inc. said that the deal would support its constructive view on oil, while cautioning that near-term prices may gyrate amid concern about the delta variant, analysts including Damien Courvalin said in a note. The planned output increase was moderate and would keep the market in deficit.

VI Investment

The focus will now turn to demand given the immediate uncertainties about supply have disappeared, said Will Sungchil Yun, a senior commodities analyst at VI Investment Corp. in Seoul. The deal was made on the assumption that the pandemic will subside by next year, but the fast-spreading delta variant could continue to impact oil markets for some time, he added.

ANZ Bank

The deal is likely to lead to some weakness in the short term as investors unwind positions on the prospect of higher supply, said Daniel Hynes, a senior commodities strategist at Australia & New Zealand Banking Group. The market is still relatively tight and the sell- off should be short-lived, he added.

©2021 Bloomberg LP

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