By Barani Krishnan
Investing.com – Even the second largest U.S. crude draw for this year couldn’t do it for oil bulls — not when there’s bigger fish for the market to fry.
OPEC+ sources, speaking anonymously, told the media on Wednesday that the standoff over August production quotas between the United Arab Emirates and Saudi Arabia had been resolved as the two had apparently reached a deal.
Hours later, the Emirates shot back, saying nothing has been decided. “No agreement has yet been achieved with OPEC+ on a supply accord, and discussions are still ongoing,” the UAE Energy Ministry said.
With that, oil prices, which rose strongly in the previous session and ahead of the release of U.S. inventory numbers on Wednesday, plunged anew, continuing their descent even after data showing an eight straight weekly draw in crude stockpiles.
New York-traded West Texas Intermediate crude, the benchmark for U.S. oil, was down $2.08, or 2.8%, at $73.17 a barrel by 1:37 PM ET (17:37 GMT).
London-traded Brent, the global benchmark for oil, fell $1.76, or 2.3%, to reach $74.73.
The slump defied the crude draw of 7.9 million barrels for last week reported by the US Energy (NASDAQ:USEG) Information Administration. That was the largest weekly drop of its kind since the 8.0-million barrels reported for the week to May 3.
“The Emiratis are showing that they aren’t willing to take any scraps from the Saudis,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “It’s all a fight over market share now that oil prices are up this much and it looks like the Saudis have to compromise with the UAE if they wish to keep prices at these levels.”
Until the Saudi-UAE row, oil had a near-perfect rally, with WTI up 57% on the year and Brent rising almost 50% on model production unity shown by OPEC+.
OPEC+ — which groups the 13 original members of the Saudi-led OPEC, or the Organization of the Petroleum Exporting Countries, with 10 assorted oil producers led by Russia — began by holding back 10 million barrels daily from the market to bring back prices virtually destroyed by the coronavirus pandemic.
Only in recent months had the 23-member alliance started adding to production, and that too marginally. Till now, OPEC+ is withholding almost 6.0 million barrels of daily capacity from buyers in a market that could be starved of supply as peak summer demand for energy kicks in. This is what had led to oil’s fairytale-like rally from minus $40 for a barrel of US crude at the height of the COVID disaster to around $75 now.
OPEC+ was supposed to have agreed on a hike of at least 400,000 barrels per day for August.
Theoretically, the lesser the oil in the market, the better it is for prices. But in OPEC+’s case, the Saudi-UAE stand-off has also sent off signals that the admirable production unity that had existed previously in the group might be over, and more countries might want to put out more barrels if they could.
Oil prices haven’t exactly collapsed on the Saudi-UAE standoff. But they have become a lot more volatile after going virtually one way — up — for nearly two months in a row.
But oil’s troubles aren’t confined to OPEC alone.
The spread of coronavirus variants and unequal access to vaccines threaten the global economic recovery, finance chiefs of the G-20 large economies warned on Saturday. While Southeast Asia and Australia have largely been the focus of new variants, Western capitals haven’t been spared either.
The United States recorded the highest number of Covid cases over the weekend since May as the highly-transmissible Delta variant of the virus became more prevalent. There is fear that Covid variants could again hit all modes of travel around the world, impacting oil consumption.
There’s also the “China problem.”
Import quota shortages, refinery maintenance and rising global prices combined in China’s first contraction in half-year oil consumption since 2013. Chinese oil imports were down 3% from January to June, year-on-year.
China’s tack on pressuring oil prices lower is similar to the strategy it deployed to pull copper prices down after the metal reached record highs of $10,746 in May. With a sharp cutback in imports, Beijing managed to push copper back below $9,400.
China’s emergence as a new negative force against oil makes the demand outlook for crude more questionable. It proves that Beijing isn’t just a cheerleader of commodity super cycles; it can also be a silent bear when prices aren’t going its way or hurting its economy.
“China amassed a huge amount of oil when prices hit a 20 year low and as prices continue to rise, China will be increasingly incentivized to tap its reserves rather than import expensive oil,” Osama Rizvi of Primary Vision Network said in a blog earlier this month.
“While this is unlikely to change the underlying fundamentals of oil markets, the reduction in Chinese imports is certainly one of the factors that could finally drive a shift in oil market sentiment,” Rizvi said.