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Oil Slumps as Market Ignores U.S. Draw to Focus on UAE ‘No-Deal’

CommoditiesJul 14, 2021 05:11PM ET
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© Reuters.

(Adds settlement prices)

By Barani Krishnan

Investing.com - Even the second largest U.S. crude draw for this year couldn’t do it for oil bulls — not when there’s bigger fish for the market to fry.

OPEC+ sources, speaking anonymously, told the media on Wednesday that the standoff over August production quotas between the United Arab Emirates and Saudi Arabia had been resolved as the two had apparently reached a deal.

Hours later, the Emirates shot back, saying nothing has been decided. “No agreement has yet been achieved with OPEC+ on a supply accord, and discussions are still ongoing,” the UAE Energy Ministry said.

With that, oil prices, which rose strongly in the previous session and ahead of the release of U.S. inventory numbers on Wednesday, plunged anew, continuing their descent even after data showing an eight straight weekly draw in crude stockpiles.

New York-traded West Texas Intermediate crude, the benchmark for U.S. oil, settled down $2.12, or 2.8%, at $73.13 a barrel.

London-traded Brent, the global benchmark for oil, fell $2.06, or 2.7%, to finish the session at $74.73.

The slump defied the crude draw of 7.9 million barrels for last week reported by the US Energy (NASDAQ:USEG) Information Administration. That was the largest weekly drop of its kind since the 8.0-million barrels reported for the week to May 3.

“The Emiratis are showing that they aren’t willing to take any scraps from the Saudis,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “It’s all a fight over market share now that oil prices are up this much and it looks like the Saudis have to compromise with the UAE if they wish to keep prices at these levels.”

Until the Saudi-UAE row, oil had a near-perfect rally, with WTI up 57% on the year and Brent rising almost 50% on model production unity shown by OPEC+. 

OPEC+ — which groups the 13 original members of the Saudi-led OPEC, or the Organization of the Petroleum Exporting Countries, with 10 assorted oil producers led by Russia — began by holding back 10 million barrels daily from the market to bring back prices virtually destroyed by the coronavirus pandemic.

Only in recent months had the 23-member alliance started adding to production, and that too marginally. Till now, OPEC+ is withholding almost 6.0 million barrels of daily capacity from buyers in a market that could be starved of supply as peak summer demand for energy kicks in. This is what had led to oil’s fairytale-like rally from minus $40 for a barrel of US crude at the height of the COVID disaster to around $75 now. 

OPEC+ was supposed to have agreed on a hike of at least 400,000 barrels per day for August. 

Theoretically, the lesser the oil in the market, the better it is for prices. But in OPEC+’s case, the Saudi-UAE stand-off has also sent off signals that the admirable production unity that had existed previously in the group might be over, and more countries might want to put out more barrels if they could.

Oil prices haven’t exactly collapsed on the Saudi-UAE standoff. But they have become a lot more volatile after going virtually one way — up — for nearly two months in a row.

But oil’s troubles aren’t confined to OPEC alone. 

The spread of coronavirus variants and unequal access to vaccines threaten the global economic recovery, finance chiefs of the G-20 large economies warned on Saturday. While Southeast Asia and Australia have largely been the focus of new variants, Western capitals haven’t been spared either. 

The United States recorded the highest number of Covid cases over the weekend since May as the highly-transmissible Delta variant of the virus became more prevalent. There is fear that Covid variants could again hit all modes of travel around the world, impacting oil consumption.

There’s also the “China problem."

Import quota shortages, refinery maintenance and rising global prices combined in China’s first contraction in half-year oil consumption since 2013. Chinese oil imports were down 3% from January to June, year-on-year.

China’s tack on pressuring oil prices lower is similar to the strategy it deployed to pull copper prices down after the metal reached record highs of $10,746 in May. With a sharp cutback in imports, Beijing managed to push copper back below $9,400. 

China’s emergence as a new negative force against oil makes the demand outlook for crude more questionable. It proves that Beijing isn’t just a cheerleader of commodity super cycles; it can also be a silent bear when prices aren’t going its way or hurting its economy. 

“China amassed a huge amount of oil when prices hit a 20 year low and as prices continue to rise, China will be increasingly incentivized to tap its reserves rather than import expensive oil,”  Osama Rizvi of Primary Vision Network said in a blog earlier this month.

“While this is unlikely to change the underlying fundamentals of oil markets, the reduction in Chinese imports is certainly one of the factors that could finally drive a shift in oil market sentiment,” Rizvi said.

Oil Slumps as Market Ignores U.S. Draw to Focus on UAE ‘No-Deal’
 

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Comments (10)
Filipe Pereira
Filipe Pereira Jul 14, 2021 8:44PM ET
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Dear Barani Krishnan;after this UAE no deal you Also have Iran scraming the world they are ready do 90% uranium enrichement...ho you Also dont know about this reality? usa tryed to stop them do it, allowing them to Pump as much as they can ... very far away from last opep cutting oil output deal...that means tons of oil cheap babys
Filipe Pereira
Filipe Pereira Jul 14, 2021 8:44PM ET
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isnt it this OPEP disagreement About above contente?
Steven Kemp
Steven Kemp Jul 14, 2021 8:01PM ET
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thats good it weeds out the weak hands
Filipe Pereira
Filipe Pereira Jul 14, 2021 8:01PM ET
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iam out on 20%profit why not be out Just watching vapping 0% THC ****no problem or having a tea relaxing waitting the wolfes to get agreement long againthen i Will quit and trade again Long..until there iam out on oil..Just selling a stock or another oil related otherwise i never sell oil
Joel Schwartz
Joel Schwartz Jul 14, 2021 6:36PM ET
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Renewable energy vehicles + better mass transit technology + work from home trend = lower demand for gasoline. It’s that simple.
Steven Kemp
Steven Kemp Jul 14, 2021 6:36PM ET
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fuel is used to create electricity to charge the cars tranport and make goods heat and cool bussiness and homes etc
Guy Gram
Guy Gram Jul 14, 2021 6:34PM ET
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I understand the crash in Oil, I don't get producers crashing on the eve of outstanding Q2 results from these insane high prices.
Jack Reacher
Jack Reacher Jul 14, 2021 6:32PM ET
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Thanks for the article. Any good/must read books you recommend on crude investing ?
Kelly Mayer
Kelly Mayer Jul 14, 2021 3:26PM ET
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Brutally overselling going on. August earnings not priced in, but global oil chaos is, as if the OPEC were a bunch of irrational chaotic toddlers. Anyway, huge profits ahead once they agree on something. And august draws nearer.
Barani Krishnan
Barani Krishnan Jul 14, 2021 3:26PM ET
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WTI is still 50% on the year. Overselling? Really? I would argue on the contrary: Overbought!
Michael Dell
Michael Dell Jul 14, 2021 3:26PM ET
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Barani Krishnan you dont know jack about oil politics and oil price
Barani Krishnan
Barani Krishnan Jul 14, 2021 3:26PM ET
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Michael Dell  Don't get emotional over your trades. And keep it courteous, ok?
Alvin Lee
Alvin Lee Jul 14, 2021 2:58PM ET
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all manipulation
Barani Krishnan
Barani Krishnan Jul 14, 2021 2:58PM ET
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On OPEC "sources" part, yes.
Ivan Ivan
Ivan Ivan Jul 14, 2021 2:42PM ET
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Why the oil deposits numbers are read? The deposits fell more than expected. What's wrong?
Barani Krishnan
Barani Krishnan Jul 14, 2021 2:42PM ET
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Sorry if you're long. Until the UAE is pacified, I don't think the uptrend will return easily.
Arsenii Raspopov
Arsenii Raspopov Jul 14, 2021 2:30PM ET
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It’s a pity
Barani Krishnan
Barani Krishnan Jul 14, 2021 2:30PM ET
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Yes. It's a pity it went up too much.
Programming Hunter
Programming Hunter Jul 14, 2021 2:26PM ET
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what does it means?
Show previous replies (2)
Barani Krishnan
Barani Krishnan Jul 14, 2021 2:26PM ET
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frank zapper  Thank you for clearing that up with him :)
Barani Krishnan
Barani Krishnan Jul 14, 2021 2:26PM ET
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Thomas Read  Appears to be so. The Saudis need to strike a deal if they want to keep the market where it is. Any slack in the EIA data and you'll see a $5 drop next. The EIA data is the only reason now for oil to go any higher. Asia? Forget it; China has started cutting, as the story says.
Remone Me
Remone Me Jul 14, 2021 2:26PM ET
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When is eia data releaed?
Barani Krishnan
Barani Krishnan Jul 14, 2021 2:26PM ET
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Remone Me  Every Wednesday at 10:30 AM Eastern. Unless there is a holiday the week prior; then it will be Thursday, 11 AM ET the following week.
Filipe Pereira
Filipe Pereira Jul 14, 2021 2:26PM ET
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Yeah dear Krishnan, and the deal must include oil out put cuts as on the prior One, otherwise it Will drop hard. i never speculate against oil, i Will be out on profit 20% from may until now and i Will buy again deeper once they make a good agreement
 
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