Oil mixed amid U.S. inventories draw, OPEC+ impasse

Oil prices were mixed on Friday after a boost from a drop in U.S. crude and gasoline inventories, but were still set for a weekly decline on concerns that an OPEC+ impasse could swell global crude supplies.

WTI oil price rose 0.18% to $72.832 per barrel and Brent oil rose 0.21% to $74.095 per barrel  by 15:50(GMT+8).

Both benchmarks were headed for a loss of nearly 3% for the week, as traders remained worried that the collapse of talks between the Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+, could lead to a rise in crude supplies.

“A large decline in the U.S. stockpile reinforced views that fuel demand was growing as the U.S. driving season has begun,” said Hiroyuki Kikukawa, general manager of research at Nissan Securities.

“Since there has not been any major lift in the U.S. shale output, some investors became bullish despite the OPEC+ spat,” he said.

U.S. crude and gasoline stocks fell and gasoline demand reached its highest since 2019, the U.S. Energy Information Administration said on Thursday, signaling increasing strength in the U.S. economy.

Crude inventories fell by 6.9 million barrels in the week to July 2 to 445.5 million barrels, the lowest since February 2020, and more than the expected 4 million-barrel drop estimated in a Reuters poll. Gasoline stocks fell by 6.1 million barrels, exceeding expectations for a 2.2 million-barrel drop.

Even with oil prices rising toward $75 a barrel, U.S. shale producers are keeping their pledges to hold the line on spending and keep output flat, a departure from previous boom cycles.

Still, some traders feared members of the OPEC+ group could be tempted to abandon output limits that they have followed during the pandemic due to the breakdown in discussions between major oil producers Saudi Arabia and the United Arab Emirates.

The two Gulf OPEC allies are at odds over a proposed deal that would have brought more oil to the market.

Russia was trying to mediate to help strike a deal to raise output, OPEC+ sources said on Wednesday. The United States had high level conversations with officials in Saudi Arabia and the UAE, the White House said on Tuesday.

“I think it’s highly likely [that] it’s going to resolve itself,” said Stephen Schork, a principal advisor at energy analysis company The Schork Group.

OPEC is the strongest it has been in years, and they would not want to “upset the applecart,” he told “Street Signs Asia” on Thursday.

Observers say two scenarios are possible if OPEC doesn’t reach a new deal. The first is that of a price collapse.

Neil Beveridge, a senior oil analyst at Bernstein noted that OPEC is sitting on nearly 6 million barrels of spare capacity now. If countries decide to increase supply and go for market share, the downside could be “significant,” he said.

“We can see oil prices certainly drop back below $50 again … pretty quickly, if that [happens],” he said. pump more oil while the OPEC agreement remains in place. It wants this baseline to be revised.

The second scenario is one where countries continue to produce oil according to the quotas that were previously agreed on. Oil prices would spike, possibly as high as $100 per barrel, with demand outpacing supply.

OPEC probably doesn’t want to rock the boat in either direction, according to Stephen Schork, a principal advisor at energy analysis company The Schork Group.

“They are in a very nice position at this point,” he said. “Why mess around with, potentially, a price war?”

On the other hand, too-high oil prices are not ideal. “The higher we go, you’ll start to hear the political winds turn against them, especially here in the United States,” he added.

Schork said he believes the UAE will be allowed to increase production, and the country will stick to their quota.

“They just want a bigger share of OPEC’s prize,” he said.

Bernstein’s Beveridge, however, said there is a risk that other OPEC+ members will want to raise their production quotas.

“That could lead to a whole unravelling of the OPEC agreement that we have … and that would certainly point to very significant downside [for] prices,” he said.

The deal only works if everyone is committed to it, he said, but noted that there has been “very good compliance” from OPEC members over the last 12 months.

In the long term, Schork said the oil-producing alliance would benefit from the energy transition.

“As western oil companies trip over themselves in the years ahead — and they’re already doing it now — to decarbonize, OPEC’s share of the global oil market is going to continue to grow,” he said, adding that oil demand is likely to increase until the end of the decade.

“It behooves all players on the OPEC side to play nicely, so yes I do think we’ll see a resolution to the situation sooner rather than later,” he said.

World food prices, already inflated

Rising costs to ship crops globally are adding to concerns about food inflation that are already at decade-highs and hitting cost-sensitive consumers in import-dependent markets.

With world food prices having risen at their fastest pace in over a decade in May, the spike in crop freight costs poses a fresh challenge to food importers and policymakers attempting to keep inflation levels in check just as several key economies reopen following coronavirus lockdowns.

And the price of key crops like corn and soybeans are set to remain elevated and volatile through the rest of the northern hemisphere growing season as crops develop.

Chicago corn futures are up roughly 90 per cent from a year ago on strong global demand and stressed crops in the United States, while soybeans are up more than 50 per cent after drought clipped output in top grower Brazil. Wheat is up around 30 per cent from a year ago following growing problems last season.

The cost of moving grains from Australia to Southeast Asia has risen to $30 a tonne from $15 last year, and to $55 from $25 from the U.S. Pacific Northwest to Asia, shipping sources said.

Ships carrying wheat from the Black Sea to Asia now cost around $65 a tonne, from around $35 last year.

The cost of bulk carriers that move grains and oilseeds from production hubs in the Americas and Black Sea to key consumers have roughly doubled from last year due to rising fuel costs, tighter vessel supply and longer port turnaround times amid COVID-19 curbs, according to grain and shipping sources.

“Freight cost has become a real challenge as it comes when we see huge increases in grain prices,” said Phin Ziebell, agribusiness economist at National Australia Bank in Melbourne.

“For years, buyers enjoyed low grain and freight prices. I see no immediate end to high freight costs.”

“It is the cost of bunker fuel and the cost of bulk ships lifting the prices of carrying grains,” said one trader at a leading brokerage in Singapore. “We also have Covid-19 quarantine requirements slowing cargo movement.”

The double whammy of higher crop and freight prices is pinching buyers in Asia, the top crop consuming region and home to China that accounts for more than half of the world’s soybean purchases. Japan is one of the world’s biggest corn buyers.