OPEC+ deadlock unresolved – what does this mean for the oil trade?

OPEC & allies are yet to reconvene its July meeting as supply pressures mount on the cartel. Will we see the deadlock broken soon?

Oil trading

A week on from OPEC and allies breaking up production tapering talks, the deadlock doesn’t look like it’s going to be shifted soon. The window for higher output in August is closing. This comes despite clamour from the cartel’s various members to take advantage of strong oil prices.

Saudi Arabia and the UAE remain at loggerheads over production volume increases. However, both have locked August supply volumes in with their respective customers.

An upcoming Islamic holiday, coupled with fixed August sales, means reconvening OPEC+ if an accord is reached is unlikely to happen until the end of July or even early August. As it stands, output will remain the same in August as it was in the previous months – assuming OPEC members and allies don’t just go rogue and start pumping more to take advantage of high oil prices.

And there’s the rub. Part of the reason why oil prices are so strong is OPEC & allies finding common ground and tapering production gradually instead of flooding markets with crude.

At the time of writing, oil prices for WTI and Brent had peeled away from highs seen last week but are still performing strongly. WTI futures contracts are at the $74.39 level.

Brent crude is currently trading for $75.45.

August will likely be a story of tighter global supply meeting high worldwide demand. The Biden White House has advised OPEC+ to find a way through and begin its proposed 400,000 bpd production increase.

This comes as EIA data for week ended July 2^nd saw one of the highest drops in US crude inventory stockpiles since 2019.

Crude inventories fell by 6.9 million barrels to 445.5 million barrels in the review period, reaching their lowest levels since February 2020. This beat analyst expectations, which forecast a 4m barrel drop.

Gasoline demand surged to a one-week record, but the four-week average of gasoline supplied was at 9.5 million bpd, the highest since October 2019. That helped lower gasoline stocks by 6.1m barrels.

Perhaps in response to the OPEC tussle, or because the conditions are brightening for domestic oil producers, the US rig count has increased for the second week running this week.

According to Baker Hughes, the number of operational US rigs is at its highest level since April 2020 with 378 currently operating.

Natural gas trading

Natural gas started the week on a strong footing, with prices staying above the $3.70 level.

Hotter weather this week into next is expected to cater to heightened cooling demand, as per Natural Gas Weather.

NGA says: “National demand will increase this week as upper high pressure builds back across the East with highs of upper-80s to 90s, while still hot to very hot over the West into Texas and the Plains with highs of 90s to 110s. A weather system with areas of showers will stall over the South Great Lakes and East-Central US with highs of 70s to lower 80s for locally lighter demand.

“National demand will ease late next weekend as weather systems over the Great Lakes and East cool highs into the 70s and 80s, although still hot over the West, Texas, and Great Plains. Overall, national demand will be high this week.”

Broadening the view, the EIA is predicting a decline in natural gas consumption throughout the US in 2021. According to recent research by the energy body, US natural gas consumption averaged 83.3 Bcf per day in 2020 – down 2.2% from 2019. The drop was partly driven by a fall in natural gas used to generate electricity, which was a result “demand destruction” the EIA says.

The energy authority believes consumption will have fallen 1.1% overall by year-end 2021 but will rise by 0.7% across 2022.

Working gas in storage was 2,574 Bcf as of Friday, July 2^nd, according to EIA estimates. This represents a net weekly increase of 16 Bcf. Stocks were 551 Bcf less than last year at this time and 190 Bcf below the five-year average of 2,764 Bcf.

Baker Hughes reports the gas rig count has increased. 101 US natural gas rigs are now currently operating in key production areas.