Oil starts the London trading session today bearish, as a build in the U.S. gasoline inventories and a potential Organization of the Petroleum Exporting Countries and allies (OPEC+) agreement to increase supply prevented the bulls from taking over.
Brent oil futures is down 1.14%, trading at $73.91 a barrel while the U.S oil, WTI futures fell 1.30%, trading at $72.15 a barrel, as of the time of writing this report.
U.S. Energy Information Administration (EIA) released its crude oil supply data on Tuesday and it revealed a draw of 7.897 million barrels for the week to July 9, 2021. This is the eighth consecutive week of draws. The draw was bigger than both the 4.359-million-barrel draw in forecasts prepared by Investing.com and the 6.866-million-barrel draw recorded during the previous week. The data also revealed a 1.039-million-barrel build in gasoline inventories. Asides from this report, the American Petroleum Institute also released data, revealing a draw of 4.079 million barrels.
Saudi Arabia and the United Arab Emirates (UAE) have reportedly resolved the dispute that caused the breakdown of an OPEC+ meeting earlier in the month. This impasse within the OPEC+ group implied that the August supply increases in the balance will not take effect. The latest breakthrough proposal gives the UAE a higher input quota. However, other OPEC+ members are also seeking better terms, with Iraq reportedly pursuing a higher production baseline which may indicate that more breakdown in talks may come up in the coming months.
Another reason for the decline is investors’ concern over the recent outbreaks of the COVID-19 Delta variant in several countries and its impact on fuel demand. Australia extended a lockdown in Sydney by a further two weeks while daily cases in South Korea reached a record high of 1,600 as of July 15, 2021.
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What they are saying
Tyche Capital Advisors LLC’s managing member of the global macro program, Tariq Zahir told Bloomberg that with the prospect of more supply from OPEC+ and crude nearing overbought levels, “It’s not surprising to see it down.”
PVM Oil Associates Ltd analyst, Stephen Brennock also told Bloomberg “Trouble is brewing for the oil market… fears are mounting that rising COVID-19 Delta cases could delay full economic recovery. This, in turn, poses a significant threat to oil demand growth in the near-to-medium-term.”
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What this means
Investors should prepare for the possibility of more breakdown in talks as UAE’s baseline increase is enough precedent for other members to request for baseline increases which would ultimately mean that more oil will be in the market. If this is the case and the Delta Variant does not stop spreading, there may not be enough demand for the supply in the market. This would mean that oil prices will decline.