Crude oil prices initially fell before bouncing off their lows on reports that Saudi Arabia and United Arab Emirates have reached a compromise over oil production deal.
According to reports, the UAE will now have a higher oil production baseline at 3.65 million barrels per day for future oil deals, a sharp rise from its current 3.2 million bpd. The compromise means the OPEC+ deal may well be extended until end of 2022 as the group wanted. Under those proposals, the OPEC+ output will rise by 400,000 barrels a day each month from August. An OPEC+ meeting should be arranged soon.
The fact that oil prices rose after initially falling to the above news is a reflection of reduced uncertainty. With the agreement likely to be extended until end of 2022, supply will return slowly to the market and reduce the risks of supply shocks. The key risk now is if demand fails to grow as expected, which is directly linked to the virus situation and the potential for further lockdowns. With the delta variant rising sharply across many regions of the world, this could potentially see the return of some restrictions on travel.
Meanwhile, rising oil prices has stoked inflation worries in the US, while several emerging market economies are already struggling. Further rises in oil prices will only exacerbate inflationary concerns, raising the pressure on the OPEC to release more oil back to the market.
So, while there is a risk we may see oil prices rise further in the short-term outlook due to supply shortages, the economic situation in many parts of the world, especially oil consumer nations like India, demand that prices should be lower. With the OPEC+ set to release more oil back to the market every month, this should reduce concerns over a supply shock. There is also the potential for US shale producers to start increasing their own supplies as the global recovery takes shape. All told, the risks are skewed to the downside for oil prices.
Source: ThinkMarkets and TradingView.com
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