(Adds settlement prices)
By Barani Krishnan
Investing.com - Oil bulls thought they got more than they wished for from OPEC+: Not a barrel of additional output for August.
But there’s also the saying, “Be Careful What You Wish For." And on Tuesday, those who went long as crude prices hit seven-year highs were eventually left wondering if they’d asked for too much.
New York-traded West Texas Intermediate crude, the benchmark for U.S. oil, settled down $1.79, or 2.4%, at $73.37 a barrel for its sharpest loss in three weeks. Earlier, WTI soared to $76.98, its highest since November 2014.
London-traded Brent, the global benchmark for oil, settled down $2.63, or 3.4%, at $74.53. Brent earlier struck an October 2018 high of $77.83.
Crude prices sank as speculators’ initial jubilation over OPEC+’s failure to agree on an August output hike due to Saudi-UAE disagreement turned into fears that the spat between the alliance’s two senior-most members could scuttle the year-old unity on production cuts.
The 23-nation OPEC+ — which bands the 13 original members of the Saudi-led Organization of the Petroleum Exporting Countries with 10 oil-producing allies steered by Russia — was supposed to have agreed on a hike of at least 400,000 barrels per day for next month.
Crude prices initially spiked when this didn’t happen as any further squeeze of oil supplies in a global economy recovering from the coronavirus pandemic was seen as bullish.
The Saudis proposed that OPEC+ raise output in stages to a net of 2 million barrels daily between August and December. They also suggested withholding the full production capacity of all OPEC+ members till the end of next year instead of April 2022, without an adjustment to baseline production levels.
The United Arab Emirates, however, was unhappy about the baseline from which their production cuts were calculated, arguing that the level, set at the height of last year’s pandemic, was too low. Abu Dhabi has invested billions of dollars since to increase its production capacity and wants to pump more to make good on that money.
"Everyone knows that the OPEC+ experiment wouldn’t last forever, but this somewhat surprise move by the UAE is just a smart posturing on their behalf," said Ed Moya, head of Americas' research at online broker OANDA. "It doesn’t make sense just yet for the UAE to leave the cartel, but they sure are getting ready for the eventual battle for market share."
UAE oil production hit a record of more than 4 million barrels a day in April last year during a brief supply war between Saudi Arabia and Russia. Prior to that, the country had only ever pumped more than 3.2 million barrels a day for a whole month twice — in November and December 2018.
To be sure, on their own, the Emiratis will never be able to pump enough to flood the oil market and sink prices. But the fight they put up against the Saudis might just embolden others in the alliance to release more barrels.
"While the decision to keep output unchanged is what the current agreement says, no one should believe that OPEC+ members won’t start increasing output," said OANDA's Moya.