Early in the week, U.S. crude soared to a six-year high near $77 a barrel on fears that OPEC’s failure to agree a production increase would leave markets desperately tight. But the gains soon fizzled on concern that the dispute between Saudi Arabia and the United Arab Emirates could splinter the entire alliance and undo its production cuts agreement.
Futures advanced 0.9% on Friday, gaining in tandem with other commodities. Nonetheless, crude is down 2.1% for the week and the main focus for traders in coming days will be whether the the Organization of Petroleum Exporting Countries and its partners can repairs its split.
“The OPEC+ impasse has taken the wind out of oil bulls’ sails this week,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd.
Before talks broke down on Monday, Saudi Arabia proposed that the coalition gradually revive the 5.8 million barrels of daily capacity it still has off-line in monthly installments of 400,000 barrels through to the end of next year. But the UAE 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it will only support an extension of the pact if there are revisions to its own quota, which the country contends is outdated.
The oil market still looks like it needs extra oil from OPEC+. A proxy for U.S. gasoline demand soared to a record 10 million barrels a day as Americans took to the road for the July 4th holiday weekend, whittling down the nation’s crude stockpiles further.
“This widening supply and demand gap puts the oil market at risk of over-tightening and should give the OPEC+ leadership ample motivation to resolve their squabble,” said Brennock. “Or so you would think.”
The existing OPEC+ agreement states that output remains steady next month. That could cause world markets to tighten sharply, with forecasters such as Goldman Sachs Group Inc. warning the shortfall will amount to several million barrels a day.
Yet the longer the dispute goes unresolved, traders are reckoning with another possible outcome: that the UAE follows through on veiled threats to quit OPEC, which could cause the entire alliance to dissolve into a production free-for-all reminiscent of last year’s Saudi-Russia price war.
“The OPEC+ impasse could turn sour,” analysts at market intelligence firm Kpler Ltd. said in a report. “While the prospect of a non-agreement sounds like a bullish scenario, the less likely bearish scenario where OPEC+ tumbles and goes back to a free-for-all remains on the table.”
Squabbles within the 23-nation group haven’t been the only issue weighing on crude this week. Prices have been pressured by the spread of the coronavirus delta variant, and a stronger U.S. dollar has also dimmed the appeal of commodities.