The fears surrounding Opec’s gridlock proved short-lived once again, as the cartel emerged rather unscathed from yet another crisis-like stuation. The compromise reached between the United Arab Emirates and Saudi Arabia, came sooner than expected. It was only a week ago, when all hell broke loose, as there were calls of “Opec nearing an end” and how the Opec Plus group was “on the verge of colllapse”, were making rounds.
As unexpected and ugly the spat was, it was expected to be settled as Saudi Arabia has often showed the intent to keep the cartel intact. It has previously accomodated its long-held stances for other bigger players such as Russia. Brent and WTI receded yesterday from multiyear highs, as the news of a likley deal emerged.
The agreement is still to be approved by the group, when it meets next. There is strong likelihood emerging that the Emirates will be offered a middle ground on the revised base of increased output that will last for the entire 2022. What could further weaken the prices is the increasing likelihood of other smaller players asking for similar treatment as the UAE’s. This could push the total planned produciton increase to much higher levels than envisaged earlier.
The US EIA also released the inventory levels, which were down from a week ago, but failed to push the prices further north, as Opec deal emerged likelier. Demand from China has also setback the prices, as the world’s largest fuel importer reported a drop in half yearly imports, for the first time in many years.
The reemergence of Covid variants, especially in Asia, is likely to keep the bulls in check. Recall that much of the optimism around oil prices was pinned around recovery in big Asian economies, which can now take longer than earlier anticipated. The vaccine rollout has been markedly slower in much of Asia, and that means restrictions of one kind or another will keep oil demand suppressed, or at least far from optimal levels. Oil may not be heading to $100/bbl as talked about earlier in the rally. It may well fall back to the $60s sooner.