Oil Has First Meaningful Drop in a Week on OPEC Uncertainty, Asia Covid

© Reuters.

By Barani Krishnan

AiVIF.com - Oil prices had their first meaningful drop in a week on Monday on uncertainty over production hikes that OPEC+ would likely agree to this week amid rising Covid cases in Asia.

New York-traded West Texas Intermediate crude, the benchmark for U.S. oil, settled down $1.14, or 1.5%, at $72.91 per barrel. It was the lowest settlement for WTI since June 22.

London-traded Brent, the global benchmark for oil, finished the session down $2.04, or 2.7%, at $74.14.

Prior to the selloff, WTI hit a 2018 high of $76.20 on Friday, while Brent hit a near three-year high of $76.20.

Despite Monday’s slide, the U.S. crude benchmark was up 50% on the year while the U.K. gauge showed a gain of around 45%.

The correction in the latest session came amid reports that OPEC+ at its meeting this Thursday could increase oil production between 500,000 and 1 million barrels per day starting in August.

The 23-nation OPEC+ — comprising the 13-member Saudi-led Organization of the Petroleum Exporting Countries and its 10 Russian-steered allies — is meeting after months of sustained crude price hikes that some analysts fear might begin impacting demand. Some OPEC+ members led by Russia also want a substantial production hike to maximize revenue from current prices.

Much will, however, depend on whether Saudi oil minister Abdulaziz bin Salman will allow an OPEC+ output hike large enough to cool the market.

Alternatively referred to as AbS by his initials, the minister surprised many by acknowledging last week that crude prices may have risen too much, too fast. “We have a role in taming and containing inflation, by making sure that this market doesn’t get out of hand,” he said.

Since AbS came to office a little less than two years ago, each OPEC+ meeting he’s chaired began with calls for significantly higher production quotas. The minister deftly shot each one down, reminding the output hawks in the group that there was something more important: The price of oil itself. That is, aside from demand and market share, of course.

As a result of his efforts, compliance with Saudi-led production cuts in OPEC+ — a group often known for overpromising and under-delivering — has reached 122%. The additional 22% of over-deliverance is due to just one source — Saudi Arabia itself.

AbS’ determination thus far in holding onto deep cuts — OPEC+ is still keeping almost 6 million barrels daily from the market — is evident from the mantra he recites each time he’s asked whether he’s happy about oil demand. His standard reply: “I will believe it when I see it.”

Despite global inventories back at five-year seasonal trends; despite the market virtually draining all of the excess supply from the Covid-triggered glut; despite U.S. drillers pumping 2 million barrels less per day now than before the pandemic; and despite a barrel trading three times higher today than 15 months ago, AbS is still not convinced about oil demand.

Market sources say that unless OPEC+ agrees to an August hike of more than 500,000 barrels daily, the crude rally is unlikely to lose its momentum, market sources say.

Monday’s slide in oil prices also came on the back of a spike in Covid-19 cases in Asia. Australian authorities have placed Sydney and Darwin into lockdown and put other major cities on high alert, in an attempt to contain outbreaks of the highly contagious delta variant.

Elsewhere in that region, Indonesia was battling record-high cases, Malaysia extended a national lockdown beyond Monday, and Thailand announced new restrictions in the capital Bangkok and its suburbs.