Crude oil prices jumped to multi-year highs last week. US WTI futures rallied to a near seven-year high of $76.98 a barrel while its Asian benchmark Brent revisited the levels last seen in November 2018. The recent rally in prices was associated with OPEC plus members discussion over production policy and demand optimism from emerging markets.
Prices were stuck in a tight range for several months until June on concerns over the pace and efficiency of the Covid vaccine. Despite the fact, that many economies posted encouraging economic releases, a second wave of pandemic and related lockdown in many countries weighed down the demand outlook of oil.
OPEC+ members have been working to limit the excess oil supply which has had an adverse effect on global oil prices in the last two years. The producer's cartel kicked off a historic output cut since April 2020 in which all the group members agreed to strictly comply with the baseline production levels. The group cartel agreed to cut output by 10 million barrels per day last year, approximately 10 percent of the world output. Later, the curbs were relaxed gradually and now stand at about 5.8 million barrels per day.
Meanwhile, ministers and officials of the producers' cartel meet periodically to discuss the output policies and take actions accordingly. This coordinated effort helped to offset the supply glut of oil and aided prices to shot up considerably.
However, the latest OPEC+ meeting was called off due to a disagreement in baseline production between UAE and Saudi Arabia. Future date for resuming the negotiations were also not decided in the meeting. This uncertainty is making oil market conditions vulnerable.
As per reports UAE wanted to change the parameters of the agreement to pump more crude oil. UAE accepted the proposal to raise output from August to December but rejected extending output curbs till the end of 2022. UAE is seeking an increase in its current baseline production levels as the country has already invested billions of dollars to increase production capacity.
Nevertheless, this appears bullish for oil prices as the current output restrictions remain unchanged. Investors' are worried on a supply squeeze amid growing evidence of a rebound in demand and a shortfall in US shale production.
It may take some time for a deal to emerge between OPEC+ members, there are expectations of an increase in output for August to December period. The producer cartel tentatively agreed on an increase of 4,00,000 bpd in their latest meeting that probably hit markets by August. Traders also forecast more barrels from Iran once the US Iran nuclear deal is struck. Iran can add about one to two million barrels per day to the global oil market.
Despite the threat of more oil in the market, demand continues to be rosy due to optimistic global economic outlook. Accelerated vaccination and lifting of lockdowns in several counties will assist the fossil fuel. Investors may also bet on increased demand from the US as the country has almost recovered from Covid-19 ahead of the summer driving season.
Demand is reportedly higher, especially from regions with high vaccination rates like Europe and US. Significant demand growth is yet to be seen from Asia, the top oil consuming region, which uses roughly 37 percent of the global produced. High prices and many Asian countries still battling against the deadly pandemic weighing the sentiment.
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