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Oil: What’s Next For OPEC’s ‘Dirty Harry?’

By Investing.com (Barani Krishnan/Investing.com)CommoditiesJul 20, 2021 04:03AM ET
www.investing.com/analysis/oil-whats-next-for-opecs-dirty-harry-200592396
Oil: What’s Next For OPEC’s ‘Dirty Harry?’
By Investing.com (Barani Krishnan/Investing.com)   |  Jul 20, 2021 04:03AM ET
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“I’m going to make sure whoever gambles on this market will be ‘ouching’ like hell',” Saudi Energy Minister Abdulaziz bin Salman vowed back in September, in a threat aimed at oil bears. 

Oil Daily
Oil Daily

Promising to make crude prices as “jumpy” as possible for those shorting them, he called on his rivals to “make my day”—a taunt used by Dirty Harry, a maverick cop, on the bad guys in the movies of the same name from the 70s and 80s.

It took a while for the Saudi minister—sometimes referred to by just his initials, AbS—to make good on the promise. But when he did, at least some oil bears must have been ‘ouching.’ Crude prices jumped 25% over the three months to June, rising almost non-stop and up to 5% on certain days.

Now, the oil market is back in a situation where AbS might have to warn short-sellers again. The question is how effective will he be this time. 

Crude prices saw their worst plunge in 16 months on Monday, right after the OPEC+ producer alliance led by AbS announced output hikes for August onward.

While the production revision and price collapse were certainly related, the OPEC+ action itself wasn’t the actual catalyst. 

What crushed the market was worry over the resurgence of COVID cases, from the Delta variant, and the impact that could have on global growth. 

The tumble in oil came on the back of a global meltdown in equities, with at least one analyst, Ed Moya, pointing out that travel and hotel stocks got smashed on concerns that everything had been “overly priced” on bets of recovery from the pandemic.

Added Moya:

“Jet fuel demand will struggle as international travel is not happening anytime soon, especially given how several Americans are struggling to get their passports renewed even with expedited services.” 

“Even domestic travel to Hawaii is losing appeal given the limited availability for car rentals, lack of hospitality workers, and extreme price hikes for lodging and dining.” 

Considering that the near-term optimism about oil demand, particularly for jet fuel, had almost flipped overnight, one wonders whether any amount of intimidation will keep short-sellers away from trying to pull the market even lower.

For what it's worth, the bleeding in oil prices appeared to have been staunched by Monday night, with crude prices opening and staying up on Tuesday morning in Asia. 

But given the intensity of the previous day’s plunge—US crude’s West Texas Intermediate lost 7% while UK’s London-traded Brent dropped 6% for the biggest one-day percentage losses since April 2020—Tuesday’s rebound was anemic, with gains at less than 0.5% in Singapore’s afternoon trading.

That raised questions on whether the selloff in oil had merely paused and would continue. No one knows for sure because the oil market is still fairly well-balanced for the moment.

Oil Prices At A Crossroads 

Even Moya thinks the rally in oil “isn’t over just yet,” but concedes that “it will probably take a big break here.” How big is the question.

In Tuesday’s trade, US WTI hovered around $67 a barrel, versus its four-year high of $76.98 from July 6. Brent was around $69 a barrel, versus a 2017 high of $77.84 seen two weeks ago.

Notwithstanding Monday’s broader selloff in stocks, cryptocurrencies and even Treasuries, the tumble in oil was still surprising to some. This was because OPEC+ had tried to do just what was needed to get a production deal in August, while keeping its output well below demand levels.

The 23-nation OPEC+—which groups the 13 member Saudi-led Organization of the Petroleum Exporting Countries with 10 other oil producers led by Russia—said it will increase supply by 2 million barrels from August through December. 

The deal to add 400,000 barrels daily each month over the next five months was precisely what the alliance tried to come to agreement on two weeks ago, before the United Arab Emirates objected to having its baseline output—from which cuts are being calculated—stuck at March 2020 levels.

Under the revised deal, the UAE will see its baseline production increase to 3.5 million bpd from May 2022 from today's 3.168 million.

OPEC+ also agreed on new output quotas as well for several members from May 2022, including the UAE, Saudi Arabia, Russia, Kuwait and Iraq. The Saudis and Russians who lead the cartel will see their baselines rise to 11.5 million bpd each from the current 11 million. The overall adjustment will add 1.63 million bpd to supply from May next year, according to Reuters calculations.

Overall, the net addition of 2 million barrels agreed over the next five months is still short of an estimated 3.5 million barrels of higher demand envisaged for the period. 

But that demand estimate was also made before the Delta induced, COVID blow-ups we’ve seen in recent weeks.

Tug of War: Delta Variant Versus Oil Demand

Cases of the Delta variant of COVID have surged since mid-June, prompting some countries, including Australia and South Korea, to reintroduce restrictive lockdown measures. The UK on Saturday reported the highest number of daily COVID-19 cases since January 2021, ahead of England’s lifting of most restrictive measures on July 19.

To be sure, there’s no certainty on what oil demand will be over the next five months, though it’s expected to be substantial. Likewise, there’s no knowing what the fall-to-winter wave of the pandemic will be, though it could also be substantial.

So, back to the question raised at the start: Will AbS and OPEC+ be able to ward off the oil bears from causing more damage?

The answer is probably yes, but odds are that crude prices have more to lose since OPEC cannot immediately cut production—its biggest weapon against short-sellers—just after announcing hikes for August onward.

While the oil cartel is still withholding some 5.8 million barrels from the market, it may have to wait patiently for the next wave of the pandemic to subside—or the lingering summer demand for oil to be truly overwhelming, as projected, to give crude prices another mega boost.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Oil: What’s Next For OPEC’s ‘Dirty Harry?’
 

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Oil: What’s Next For OPEC’s ‘Dirty Harry?’

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Comments (5)
David Bennett
David Bennett Jul 20, 2021 11:02AM ET
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this oil market is very simple, restrictions on US federal drilling that trickles in to all drilling in some states, ie Colorado, oil will be north of $100.00 within a year, couple with the drip- drip new opec deal. Versus no government regulations and capital wise spending operators, as we saw in. 2028 and 2019 kept prices at $55 a bbl. But make no mistake oil is going north of 100.
Barani Krishnan
Barani Krishnan Jul 20, 2021 11:02AM ET
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And no mistake, David: Consumers will ultimately what they want to pay for this. There's something more powerful than OPEC: The economy.
Anthony Armijo
Tbone Jul 20, 2021 8:46AM ET
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He forgets to discuss the return of tight oil
Barani Krishnan
Barani Krishnan Jul 20, 2021 8:46AM ET
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Tight oil is a buzzword; it doesn't mean anything when demand doesn't match expectations, or is unable to keep up with growing stockpiles. Things are balanced as of now, but tight oil is more of a hype, perpetuated by Goldman Sachs and BofA, who'd love nothing more than see their predictions of $80 and $100 a barrel, respectively, come true. These Wall Street outfits are willing to use any cherry-picked data to prod the market toward their forecasts.
risky chor Bap
risky chor Bap Jul 20, 2021 8:31AM ET
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Why should he warn the Bears ,they ( the Saudis) themselves threw it to negative by overproducing and allowing so many countries fill their strategic reserves.He also has to understand if bears take over again it will go negative again as most countries have huge reserves unlike before.Firstly ,they need discipline in their attitudes and earn the  trust of the world when convening OPEC meetings and taking decisions
Barani Krishnan
Barani Krishnan Jul 20, 2021 8:31AM ET
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True. There is nothing that AbS hates more than losing to oil bears. But he hasn't got the gumption to stand up to kid brother/megalomaniac MbS, who basically fired last year's price war with the Russians that sent WTI to minus $40 a barrel. Actually, it's the Saudis who need OPEC; on their own, most oil producing states will just produce according to market and raise the number of barrels to cover the additional revenue they need. It's the Saudis who need high priced oil, to the tune of above $70 per barrel. The Russians are just going along with OPEC because it's a win-win situation for them. Without the pact, they can still do well -- not the Saudis.
Alvaro Grant
Alvaro Grant Jul 20, 2021 8:30AM ET
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I'm writing to inform the general public about my stock I wish to sell at an affordable price rate.  Bitcoin BTC/USD is currently at the rate of 29,486.4 at the moment and due to some financial situation and involvement I have decided to sell my 55 Bitcoin BTC/USD at the rate of 20.567.6 per BTC each. if interested text me thanks.
Titus Pullo
TitusPullo13thhh Jul 20, 2021 8:30AM ET
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sounds legit.
Louis Lipps
Louis Lipps Jul 20, 2021 6:03AM ET
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This Delta variant is new because fear mongering people to getting vaccinated, paid for by advertising by the vaccine makers themselves.  It's an excuse to keep people from returning to in person work and it's an excuse to delay schools from reopening in the Fall.  Are cases up?  Yes.  Deaths?  Not so much.  At least not here.  Go look at UK cases through the roof.  Deaths haven't moved.  Almost non existent.  This Delta is a good thing because all the unvaccinated are getting it and will then be immune from this flu.
Barani Krishnan
Barani Krishnan Jul 20, 2021 6:03AM ET
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It's what the markets are trading on Louis, and that's what matters for now.
Titus Pullo
TitusPullo13thhh Jul 20, 2021 6:03AM ET
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The people that are refusing to get vaccinated in countries where the vaccine is readily available tend to be from lower income areas. Most rich folks have gotten the vaccine and are ready to move on, the poor and the skeptical are slowing down the reopening, just my opinion.
 
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