Oil goes off the boil

Brent crude prices fell below $70 a barrel this week after Opec members Saudi Arabia and the United Arab Emirates patched up their differences. The squabbling between the two countries about production quotas had prevented the oil cartel from agreeing to raise output.

Asked how the two sides had reached their compromise the Saudi energy minister replied, “Why should I divulge it? This is an art and we keep it between ourselves”, reports Natasha Turak for CNBC.

Opec+ (Opec plus Russia) is still collectively pumping 5.8 million barrels per day (mbpd) less than it did before the pandemic, but it will now raise production by 400,000 bpd every month beginning in August. By September next year it plans to have unwound the entirety of its Covid-19-induced production cuts.

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The members feel confident that a recovering global economy can absorb the extra capacity. Brent crude had been trading as high as $77 earlier this month, but the Opec+ deal combined with worries about the Delta variant to rout the oil bulls early this week, says Pippa Stevens on CNBC. Brent fell by 6.75% while US futures lost 7.5%. Despite the plunge, analysts think “a tight market will continue to support prices”. Citi “sees Brent…climbing to $85 or higher this year” as “pent-up leisure demand” prompts a summer consumption surge.

The gradual pace of the output hikes should keep global oil markets in deficit over the next few months, according to Samuel Burman of Capital Economics. So Brent should stay around current levels of $70-$75 per barrel for the remainder of this year. By early 2022 the global market will swing into surplus as the output hikes become bigger. “We expect that the price will fall to $60 by the end of 2022 as its supply floods back onto the market.”