Futures in New York declined 0.8% this week, although the U.S. crude benchmark closed higher on Friday amid a broader market rebound. Prices whipsawed this week amid ambiguity over the future of the OPEC+ alliance and swings in the U.S. dollar. A stronger dollar makes commodities priced in the currency less attractive to investors.
“Nobody really knows how the supply growth is going to project from here,” said Peter McNally, global head of industrials, materials and energy at Third Bridge. “The world needs more oil and was expecting more oil, so while there’s this uncertainty around supply, demand keeps growing.”
Oil accelerated to a six-year high earlier this week after OPEC+ failed to ratify a production increase, spurring concerns of a supply shortfall. Fuel consumption is rising in countries such as the U.S., India and China during the summer driving season. Americans have hit the road with gusto, leading to rapidly draining inventories and U.S. refineries running close to full-bore to keep up with demand.
“We’re now in the middle of what appears to be an extremely robust summer and the U.S. seeing very large stock draws, fundamentally, that we anticipate will continue to support the market,” said Michael Tran, an analyst at RBC Capital Markets.
At the same time, the OPEC+ alliance and U.S. shale producers have practiced discipline toward returning supply that was shelved during the pandemic. The global oil market will remain in “deep deficit” of more than 3 million barrels per day through the third quarter of the year, according to Citigroup analysts. OPEC+ countries will need to add more oil to the market at a higher level “sooner or later,” said the report.
Before talks broke down earlier this week, Saudi Arabia proposed that the coalition gradually revive 5.8 million barrels of daily capacity in monthly installments of 400,000 barrels through to the end of next year. But the United Arab Emirates blocked an agreement, saying it will only support an extension of the pact if there are revisions to its own quota, which the country contends is outdated.
If no agreement is reached, the existing one states that output will remain steady next month. The unresolved deadlock also threatens to unravel the alliance altogether and spark a fresh price war.
Meanwhile, traders are also eyeing the global spread of the delta variant, which has taken hold in countries with lower vaccination rates, especially in Asia. New mobility restrictions threaten a further oil demand recovery.
“It’s not all pointing in one direction on the economic recovery,” said McNally of Third Bridge.