OPEC+ provided oil traders with some early fireworks ahead of the U.S. Independence Day weekend as they failed to agree to an increased oil production. It was assumed that when Saudi Arabia and Russia agreed on a modest 500,000-barrels-or-less production cut per month till the end of December, that the rest of the group would just fall in line. Not so fast.
The UAE put a monkey wrench into the meeting by failing to agree to the production increase because they felt that the baseline from which OPEC+ was using to base the production increase put them at a disadvantage. This could derail the entire OPEC production increase and create a different type of production war. The derailment put oil prices above $75 a barrel for the first time since 2018.
Last year when the global oil market fell apart, a disagreement between Russia and Saudi Arabia caused both countries to ramp up production at a time when demand was falling. That caused oil prices to crash to below zero. If OPEC fails to agree to increased production and instead keeps production at current levels, we may see a global supply shortage in just a few months. If that happens, we will see prices do the opposite of what they did when oil prices went to zero. How high is the stratosphere. Yet, there is still time for OPEC and the UAE to put aside their differences. The group is going to try to negotiate with the UAE today to come to some kind of final settlement. So far, at this point, reports show that they have failed to resolve their differences.
Energy guru Anas Alhajji did a great job explaining the issue. He points out that the proposal that OPEC+ was considering was to increase production by 2,000,000 barrels a day between August and December in 400,000 barrels a day monthly instalments. Even at that, 400 barrels a day was below the 500,000 barrels a day that the market was minimally looking for. They were looking to extend the cuts from April of 2022 to December of 2022 and apparently their goal was to bring “market stability and clarity” to the market. This agreement was based upon production numbers that they used in October of 2018 that was their baseline from which OPEC+ would decide who gets more barrels and what percentage. The UAE doesn’t think that’s a fair assessment. They wanted to change the base to April 2020 when the production cut agreed on the reason. That is because the UAE’s crude production in October of 2018 was 3.160 million barrels a day, but it increased to 3.841 million barrels a day in 2020. By changing the base, the UAE can increase its production drastically and immediately. The problem with that is while that helps the UAE, it hurts other OPEC producers who have the opposite problem, higher production in 2018 and lower production in 2020. Those members will not agree to a change in the base. There are also concerns that if they change the baseline, it would create confusion in the market and nullify the objectives of creating stability and clarity in the market.
Now while this drama plays out there’s still a lot of hope that there’s going to be a way to allow the UAE to get a few more barrels and save the production increase. If not, then we’re going to face a situation where if OPEC complies to their current production cuts, we’re going to see a significant supply deficit in the second half of the year. Even if the proposed increase goes into effect, it’s still going to leave the market very, very tight.
Gasoline prices this holiday weekend could be the highest they’ve been in over seven years and we are expecting to see record amounts of people on the road. Early on we were predicting gasoline prices exceeding $3.00 a gallon many months ago. We predicted it even before Joe Biden became president. Not only have we seen that but we’ve also seen prices even higher than that! Triple-A puts today’s national average at $3.12.
If that wasn’t enough for the market to deal with Mother Nature is also going to create issues as we go into this 4th of July holiday. The National Hurricane Center has a new named storm in the Atlantic called Elsa. The storm’s track currently has it going into the Gulf of Mexico and while these tracks could change it looks like it may go right up the western coast of Florida and the eastern part of refinery row. While the storm track may change, it will more than likely disrupt production, imports and will generally cause havoc on inventory numbers in the next couple of weeks. It will probably also disrupt some holiday plans and let’s hope and pray that there is little damage and no one gets hurt from this tropical storm.
Natural gas had some major issues as well. Not only did they have a pipeline outage and reduction inflows even greater than 2 Bcf/d Columbia but what saved the market from a massive rally was the fact that the weekly inventories from the natural gas supplies came in surprisingly high. The EIA reported that weekly gas and storage hit 2.558 BCF that was up 76 BCF from the week before and probably 10 to 11 BCF higher than the market was looking for. Yet this increase in supply might only be a bump in the road in what is increasingly a very bullish market for natural gas.
Reuters reports that June shipments to Japan rose by 18% from May and China LNG imports in June was up 26% year over year. They report that buyers stockpile ahead of winter to avoid gas shortages Dutch TTF gas at a record high on low LNG supply.