Crude oil prices retreat as market digests OPEC+ production stalemate

Crude oil prices moved lower in early US trading July 6 as US traders returned from a long holiday weekend to a market in search of direction after OPEC+ discussions came to a standstill on monthly production quotas.

At 1407 GMT, NYMEX August WTI was down 64 cents at $74.52/b and ICE August Brent was $1.41 lower at $75.75/b.

Saudi Arabia and the UAE remain deadlocked in discussions regarding output levels beyond August, leaving the broader OPEC+ production agreement in limbo.

NYMEX August RBOB was down 1.95 cents at $2.2803/gal and August ULSD was 2.41 cents lower at $2.1550/gal.

A third day of OPEC+ talks set for July 5 was postponed after the UAE said it wanted to lift its baseline production levels. The UAE's current baseline is 3.168 million b/d, but the country now claims a capacity closer to 4 million b/d. As things stand, there is no current date for the next OPEC+ meeting, with production levels likely to remain unchanged for now.

"The OPEC+ experiment was never going to last forever, and while I don't think this is the end it is highlighting the importance of market share," OANDA senior market analyst Edward Moya said. "The oil market should fully be prepared for the eventual ending of coordinated efforts, and right now people have to understand that while [OPEC+] has an agreement in place, you are probably going to have producers ramp up output to try and meet demand."

While the lack of an agreement increases uncertainty, base-case outlooks continue to call for gradual production increases through early 2022, Goldman Sachs analysts said in a note, adding that the global oil market needs to see an additional 5 million b/d of output by year-end to avoid critically low inventories.

According to Eugen Weinberg, Commerzbank head of commodities research, the division within OPEC could lead to drastic decisions being made. "In the past, dissent within OPEC often sparked massive price slides because members then either expanded their output unchecked or -- like last year -- Saudi Arabia drastically lowered its official selling prices to "punish" renegade members. However, the market is interpreting the current failure as meaning that the old agreement, according to which production by the OPEC countries and their allies (OPEC+) is to be left unchanged from August until April 2022."

OPEC members that are holding back production levels are likely to face growing frustration from other members, according to Warren Patterson, ING's head of commodities strategy. "The fallout within OPEC+ means increased uncertainty in the months ahead if a quick resolution is not found, which suggests increased volatility in prices," Patterson said in a note July 6.

He added that stock levels were likely to come under stress as supply tightness pushes inventories lower. "OECD oil inventories are back in line with the 2015-2019 average, and inventories are set to continue falling with global oil demand recovering as we move through the rest of the year."

Crude demand is expected to rise in the coming months as lockdown restrictions ease globally. "By the end of this year, demand should be around 97% of pre-COVID-19 levels," Patterson said. "So, without increasing supply further over Q3 2021, the market is likely to see inventories drawing down by around 2 million b/d."

"Sentiment on the oil market is very positive at present, and market participants are focusing on the looming supply deficit," Commerzbank's Weinberg said. "However, we believe that a later agreement would also benefit OPEC+ as it could then comply with customer demands for more oil and present itself as a reliable supplier."

"The continued rise in oil prices may also kick-start non-OPEC production," he said. "In the medium term, the failure of OPEC+ is therefore more likely to do oil prices harm rather than good."