Band Clyde Russell
LAUNCESTON, Australia, July 19 (Reuters) – The OPEC + deal to increase crude oil production from August has always been the most likely result of the producer group’s earlier standoff, and that should be enough to end market talks on $ 100 a barrel of oil, at least for now.
OPEC + ministers agreed on Sunday to increase production by 400,000 barrels per day (bpd) from August through December, adding a total of 2 million bpd to global supply by the end of the year. year.
Additionally, the group, which includes the Organization of the Petroleum Exporting Countries and allies such as Russia, agreed to new production allocations from May 2022, resolving the dispute sparked by the United Arab Emirates (UAE), who wanted the baseline for their production quota. raised.
The UAE will see its baseline increase by around 332,000 b / d from May, while Saudi Arabia and Russia will see increases of 500,000 b / d each, Iraq and Kuwait obtaining jumps of 150,000 bpd each.
OPEC + also plans to end all production restrictions by September 2022, but this will depend on the state of the global oil market at that time.
The impasse having been resolved and the more brutal return of global supply, the question for the market is now simple, but difficult to answer.
Will the increase in supply crush the recovery in demand, leading to a drop in the price of crude?
The bullish narrative remains that the global economy is recovering from the coronavirus pandemic, with more countries reopening as populations receive vaccines against COVID-19, the disease caused by the coronavirus.
The bearish narrative is that this process can happen, but it is not happening fast enough and is unevenly distributed, with North America and Europe recovering faster and Asia and developing countries in Africa and South America lagging behind.
So far, evidence of crude oil demand seems to support the bearish narrative, especially in Asia’s major oil-importing region.
Asia’s crude imports for July are estimated at 22.59 million bpd by Refinitiv Oil Research, up from 23.78 million bpd in June and 23.04 million bpd in May.
While this estimate may be revised up as the end of the month approaches, it is the first evidence that crude oil demand is far from an uptrend in Asia.
July’s weakness is largely due to falling demand in India, the region’s second-largest importer behind China, with Refinitiv predicting the South Asian nation to bring in 3.33 million bpd, up from 4.14 million bpd. bpj in June.
The drop can largely be attributed to the novel coronavirus outbreak in India in recent months, which has reduced demand for fuel as parts of the economy were stranded in an attempt to halt the spread of the disease.
But China’s July imports, forecast at 9.55 million bpd, are also down from June’s 9.81 million bpd, while Japan is expected to bring in 2.01 million bpd, from 2.27 million. by bpj.
Of Asia’s top four importers, only South Korea, which is expected to overtake Japan as the region’s third-largest oil buyer, is expected to import more crude in July than in June, and even then, the gain is relatively low, 3.17 million in July against 2.76 million the previous month.
There is also some disconnect in Asia between the prices of crude paper futures, such as the global benchmark Brent. LCOc1 and physical cargoes sold outside the main exporting region of the Middle East.
One such measure is the Brent-Dubai exchange against swaps DUB-EFS-1M, which measures the spread between Brent futures and physical crude in Dubai.
The premium of Brent futures over Dubai swaps ended at a relatively high level of $ 3.79 per barrel on July 16, not far from the recent high of $ 4.38 on July 7, which was the highest since April 2018.
In effect, this means that Brent paper and physically discounted crudes like those from Angola and Nigeria are trading at a historically high premium over cargoes from the Middle East.
With the OPEC + deal now in place, it is likely that investors in the paper market will be forced to face the reality that for much of the global demand for physical crude remains low and well below target. pre-pandemic levels.
Brent futures lost ground in early Asian trading on Monday, falling to $ 72.60 a barrel, down 1.3% from the July 16 close.
The OPEC + deal doesn’t necessarily end the bullish case in oil demand, but it changes the supply side of the equation, and that means the forecast of $ 100 a barrel of oil in the coming months, made by some investment banks and market players, are less likely to materialize.
(Edited by Richard Pullin)
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