What's Next for Oil Prices?
Oil prices are expected to remain volatile until clarity develops on the outlook for OPEC+ production cuts.
That’s according to a new report from Fitch Solutions Country Risk & Industry Research, which outlined that a complete collapse of the OPEC+ agreement was the least likely scenario to occur. The report did warn that the risk of a collapse was rising but noted that this probably would not happen unless the current rift expands to past grievances involving more countries.
“Issues such as past non-compliance and economic hardship had done little to sway the group’s cohesion but this latest and most significant rift with the UAE has the potential to scupper OPEC’s well-laid and long-term plans to manage the market,” analysts at Fitch Solutions stated in the report.
“The most plausible outcome at this point is a compromise which sees more barrels returned to market in 2021 and the foundations for an extension to cuts beyond April 2022 … We had expected tensions to rise in the group though eventually cooler heads would prevail and market management would continue,” the analysts added.
In the report, Fitch Solutions noted that a failure to bring more production online before the end of the OPEC+ agreement in 2022 would lead to increased production from non-OPEC+ producers and strain OPEC+ cohesion further by encouraging non-compliance from the OPEC+ group at large. The company also warned that an agreement to extend the cuts beyond their April 2022 expiry looks increasingly unlikely and could result in cliff edge addition of 5.8 million barrels of oil per day rather than a controlled taper led by market conditions.
“This would see oil prices fall substantially given our view for Iranian barrels to begin returning to market in 2022,” Fitch Solutions analysts said.
Fitch Solutions highlighted that July’s OPEC+ meeting broke up with significant rifts between the informal head of group Saudi Arabia and long-term ally the UAE. Fitch Solutions noted that the bullish nature of continued undersupply and even tighter markets at first saw prices surge but pointed out that as markets began to digest the wider ramifications of the rift, prices fell.
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