Unless a compliance rebellion rocks OPEC+’s cohesion, the lack of a new policy from August could continue to hike prices towards $80 in the coming days and weeks.
That’s according to Rystad Energy’s oil markets analyst Louise Dickson, who expressed the view in a statement sent to Rigzone on Wednesday. In the statement, Dickson outlined that the market has been put in a position of risking a sizeable undersupply next month.
“It’s not only the OPEC+ keeping a tight lid on supply,” Dickson said in a statement. “U.S. shale producers also seem to be reluctant to invest and increase their own production sufficiently to plug the supply deficit, with the rationale largely related to producers being locked into hedging positions at lower oil prices that do not incentivize production growth,” the Rystad representative added.
Dickson went on to note that there is still time for OPEC+ members to sit together again and agree on a “mutually acceptable” way to increase production before August.
“The market expectation is that a consensus will eventually be reached by OPEC+, as increasing production is prudent especially as the oil demand trajectory takes off in the second half of this year,” Dickson said.
The analyst warned that if negotiations break down and OPEC+ producers rebel against the original deal, the market could face unregulated output, “which could cause a massive negative price shock”. Dickson outlined, however, this this scenario was less likely than that of the alliance reaching an eventual deal.
U.S. Oil Production, Covid Downside
In the statement sent to Rigzone, Dickson noted that U.S. oil output is set to increase in the coming months but nowhere close to what is needed to meet the expected demand uptick.
“Shale producers for the moment seem to be focusing on returns to shareholders than investing, which is also supporting prices,” Dickson said.
“High prices are an issue, however, for private consumers and businesses and could hamper economic growth, so U.S. pressure on OPEC+ to increase output could help push for a deal going forward,” Dickson added.
The Rystad representative also highlighted that downside potential from Covid-19 infections is brewing and said the market seems to be turning a blind eye to it as the OPEC+ dust is yet to settle.
“Asian infections are on the rise and many countries have reinstated lockdowns. Some European countries that opened up are also seeing what could be the beginning of a fourth pandemic wave,” Dickson said.
“The Delta variant seems to be accelerating its spread and if infection rates escalate we could see again some lockdowns that could slash chunks demand that the market expected would recover,” Dickson added.
According to the latest weekly data from the World Health Organization (WHO), the last two weeks have seen a consecutive rise in global Covid-19 cases, following eight weeks of consecutive declines. Global Covid-19 deaths, however, have fallen for the last nine weeks, the latest WHO figures show.
At the time of writing, the price of Brent crude oil stood at $72.47 per barrel.
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