Oil Futures Rack Up Big Losses as OPEC+ at Loggerheads

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange ended sharply lower Tuesday, reversing from a fresh round of multiyear highs as the inability of the Organization of Petroleum Exporting Countries and Russia-led non-OPEC members to agree on new production quotas for the rest of 2021 raised concern that the alliance could come undone and lead to sharp production increases by OPEC+ producers.

OPEC+ ruled out meeting for a fourth time Monday in an attempt to persuade the United Arab Emirates to back away from its demand to lift its baseline reference point from which production quotas are set against, with UAE scuttling what was said to be a tentative agreement among the other 23 producers to boost oil production 400,000 barrels per day (bpd) monthly from August to December. The current OPEC+ agreement reached in April 2020 runs through April 2022, with OPEC+ through the end of July to have restored about 4 million bpd of the 9.7 million bpd in initial crude production cuts.

Futures traders initially bid up oil contracts on the failure to reach an accord by OPEC+ members, with the rally birthed on speculation that since the producer group operates on consensus, and the term of the current agreement has nine more months to go, that there would be no production hikes by members. OPEC+ compliance has been good to date, but this line of thinking is more aspirational than realistic.

The inability by OPEC+ to reach consensus does not necessarily mean the breakup of the cartel either, a scenario in which the group's producers cast off quotas and go full bore in ramping up their output. There appears to be no appetite for a market share war, with the most recent price war running for five weeks in 2020 just as governments were locking down businesses and restricting travel as the world faced the COVID-19 pandemic.

What seems most likely is for a compromise to emerge that grants UAE a higher reference point from which production cuts are based. The current agreement sets the UAE baseline at 3.168 million bpd, while UAE wants an increase to 3.85 million bpd.

UAE is investing heavily in its oil industry, announcing in November 2020 plans to spend $122 billion to lift its crude production rate by about 1 million bpd by 2030, according to the Wall Street Journal. In a world increasingly hostile to oil, a degree of urgency to monetize oil reserves is taking hold.

The dispute over UAE's baseline pits Abu Dhabi against Riyadh, two close allies that have increasingly butted heads as both the UAE and Saudi Arabia -- the two largest economies in the Middle East -- look to expand their economies. Saudi Crown Prince Mohammed bin Salman, who runs the day-to-day operations of the Kingdom, in 2016 launched Vision 2030, an aggressive economic plan that moves the Saudis away from their dependence on oil. Those plans compete with the UAE.

Analysts following political and economic developments in the Middle East said it was only a matter of time before the rivalry would spill into OPEC decisions, with the friction expected to intensify. Still, Riyadh is expected to work out of public view with Abu Dhabi to find compromise. The longer the effort takes, the probability for OPEC+ to dissolve increases.

OPEC+ did not set a date for a new meeting. In late June, TASS reported an OPEC meeting would take place on Sept. 30 in Baghdad, Iraq, which would be the first in-person meeting by the cartel since the pandemic. The proposed meeting would celebrate OPEC's 60th anniversary, delayed a year by COVID-19 restrictions and concerns.

ICE September Brent futures settled down $2.63 at $74.53 barrel (bbl), reversing from a $77.84 high, with the spot-month Brent contract last trading at that price point in late October 2018. NYMEX August West Texas Intermediate futures settled $1.79 lower at $73.37 bbl, reversing from a $76.98 six-year, eight-month high on the spot continuous chart.

A stronger U.S. dollar, which gained 0.130 to settle at 92.543 in index trade, also pressured WTI futures, with domestic crude oil and the dollar having an inverse relationship. The dollar, which held below Friday's 92.760 three-month high, strengthened despite a 3.9% decline in the Institute of Supply Management's U.S. service sector index from a record high in June. The drop back was due to supply and labor shortages however, with the sector still showing strong growth.

NYMEX August RBOB futures settled down 7.16 cents at $2.2282, reversing from a $2.3302 six-year, nine-month high on the spot continuous chart, and August ULSD futures settled down 7.42 cents at $2.1049 gallon, reversing lower from a $2.2101 32-month spot high.

Despite peak gasoline demand, Tropical Storm Elsa could contain driving demand in parts of the Southeast this week, even if only briefly. DTN Weather this afternoon said Elsa will likely intensify into a minimal hurricane as it moves across the far eastern Gulf of Mexico before making landfall across Florida on Tuesday and moving north through Georgia and the Carolinas.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne