U.S. Oil Price Jumps to Six-Year High After OPEC+ Deal Failure

(Bloomberg) -- Oil rose to the highest level in more than six years in New York as the failure of OPEC+ to ratify a production increase spurred concerns of an acute supply shortfall.

With the collapse of talks on Monday, the Organization of Petroleum Exporting Countries and its allies won’t boost output in August, unless an agreement can be salvaged. That will deprive the global economy of vital extra supplies as demand recovers rapidly from the coronavirus pandemic.

West Texas Intermediate crude for August delivery advanced as much as 2.4% from Friday’s close to $76.98, the highest since November 2014. Crude’s rally will inevitably fan concerns over inflation that are fixating central banks and much of Wall Street.

“As negotiations continue, we estimate that most outcomes still imply higher prices in coming months as the physical market tightens,” Damien Courvalin, head of energy commodity research at Goldman Sachs Group Inc., said in a report.

Discussions among the alliance dissolved acrimoniously as the United Arab Emirates blocked a proposal led by Saudi Arabia and Russia. While the situation is fluid and negotiations could be reactivated, the breakdown has damaged the group’s image as a responsible steward of the market.

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A repeat of last year’s destructive price war, which sent oil crashing, is no longer a “negligible” prospect, Goldman warns. Traders will be watching for pricing plans from the Saudis and other Middle East exporters, due imminently, to gauge their intentions.

Oil’s rally has been accompanied by sharp moves in price spreads between monthly contracts, an indication that traders see supply conditions growing tighter. In the Brent market, the premium of November contracts over December jumped by 6.3% to 84 cents a barrel.

Front-month Brent was trading for $77.61 on the ICE Futures Europe exchange as of 9:59 a.m. London time. WTI had eased a little from its peak to $76.66.

The 23-nation OPEC+ coalition had been on the brink of an agreement to restore production halted during the pandemic, in monthly increments of 400,000 barrels a day. That plan could still be ratified, or members may choose to informally leak barrels to eager consumers.

“I think a compromise will be reached which should allow additional barrels into the market from August,” said Ole Hansen, head of commodities research at Saxo Bank A/S. “The political pressure from large consumers such as India and China will grow, with Washington probably also adding some pressure.”

The White House is “closely monitoring the OPEC+ negotiations and their impact on the global economic recovery,” a spokesperson said on Monday. “Administration officials have been engaged with relevant capitals to urge a compromise solution that will allow proposed production increases to move forward.”

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