OPEC Resolves Standoff

​The oil futures markets are fluctuating as Saudi Arabia and the United Arab Emirates allegedly resolve the standoff that has prevented OPEC+ from turning on the taps for more oil. Futures got close to $75 a barrel in New York, having settled on Tuesday at the highest close since late 2018.

OPEC+ will schedule a new meeting, after the UAE successfully secured a higher production baseline. This baseline has been a bone of contention and really put the cat amongst the pigeons at last week's OPEC+ meeting. Getting past this conflict will allow OPEC+ to move forward with the planned production increases and restoring supplies in installments of 400,000 barrels a day through to late 2022.

Market demand is strong and can consume this increase in production. American crude inventories declined substantially again last week, according to an industry report published ahead of the Energy Information Administration  (EIA) data that will be released on Wednesday. In fact, gasoline and diesel demad have returned to pre-pandemic levels.

As the vaccine rollout progresses in the US and in Europe, with restrictions lifting and economies opening, we've seen oil rally more than 50% this year. Futures prices are showing a premium on nearer-term contracts, known as backwardation, which typically  indicates tightness. Indeed, the International Energy Agency warned on Tuesday that the market will tighten significantly if the OPEC+ alliance doesn’t resolve the standoff. 

However, even if OPEC+ does resolve the conflict, the world is facing a growing threat from the spread of the Delta coronavirus variant. Indonesia posted a record number of positive cases, and in the UK, cases are soaring, while Sydney extended a lockdown.

The American Petroleum Institute said crude inventories slid by more than 4 million barrels last week.  The Energy Information Administration is expected to report a similar reduction later on Wednesday, according to a Bloomberg survey. That would be an eighth straight weekly draw, the longest run of declines since January 2018 and a very clear indication of strong demand as the recovery build momentum.