U.S oil crashes below $70 after OPEC+ producers agree to raise output

Oil prices started the week on a decline after OPEC+ overcame an impasse and agreed to boost output, sparking concerns about a crude surplus as the COVID-19 Delta variant continues to spread in many countries.

The U.S. oil is down 2.85%, currently trading at $69.52 a barrel while Brent crude was down 2.65%, currently trading at $71.60 a barrel as of the time of writing this report.

What is causing the decline?

As earlier reported by Bigwig FX, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) agreed on Sunday to increase oil supply from August to cool prices that this month hit their highest level in over two years as the global economy recovers from the COVID-19 pandemic. They also agreed to new production shares from May 2022 with Nigeria’s quota to increase to 1.8 million barrels per day (BPD) from 1.4 million BPD. OPEC+ last year cut output by a record 10 million barrels per day amid a decline in demand for oil as a result of lockdown restrictions caused by the COVID-19 virus. This prompted a collapse in prices with U.S. oil futures prices at one point falling into negative territory.

What they are saying

Carsten Menke analyst at Julius Baer stated, “Longer-term, free and additional production capacities from OPEC+ countries are the key reason why we see oil moving lower again. We remain confident that the oil market is in the final phase of its upcycle.”

Goldman Sachs had a contrary opinion stated that it remained bullish on the outlook for oil and the agreement was in line with its view that producers “should focus on maintaining a tight physical market all the while guiding for higher future capacity and disincentivizing competing investments.”

ANZ Research stated, “Even with higher output, the market remains relatively tight. High-frequency data is showing encouraging signs for oil, with U.S. gasoline demand recently hitting a record high. This should limit the duration of the selling.”

Bottomline

The resolution of the conflict among OPEC+ members has pushed oil prices downward because members have reviewed output quota upward for some countries including Nigeria. This means more oil is coming into the market to meet the growing demand. However, there are concerns that the Delta variant of COVID-19 will affect the current uptick in demand. Investors are advised to trade with caution knowing these facts.



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