WTI oil fell in price to the support level of $71 per barrel and ended last week with the strongest decline since April-May. Oil markets are declining for the second consecutive session after a protracted rally that lasted five weeks. Such a long-term growth was noted for the first time since February and December, respectively. Pressure on the quotes was exerted by the growth of fears around the situation with the coronavirus and uncertainty around OPEC+. During the week, there were conflicting reports that the UAE and OPEC+ had reached a compromise, as well as that an agreement had not been reached and negotiations were continuing. In addition, as it turned out, Iraq is seeking a higher base level of production under the current deal.
In early July, OPEC+ ministers could not agree on the main two issues for five days. The UAE was not satisfied with the fact that the agreement on reducing oil production is proposed to be extended after April 2022, when it expires, on the same conditions under which it is working now. According to the UAE Ministry of Energy, the base reference level from which production quotas are considered is not relevant for them and does not take into account real capacities. Saudi Arabia rejected the possibility of adjusting this parameter on an individual basis. Due to disagreements on the basic reference levels, the ministers could not agree on a more pressing issue – the levels of oil production from August to the end of this year. Initially, all OPEC+ members approved the restoration of oil production by 2 million barrels per day at a smooth pace until the end of this year, as the supply shortage in the market increases. But due to disagreements on the first issue, it was impossible to vote on easing quotas.
In its monthly report, OPEC slightly lowered its forecast for oil production outside the organization in 2021 by 26,000 barrels per day, now it expects an indicator of 63.76 million barrels per day. The alliance notes that the overall reduction was mainly due to the downward revision of production forecasts for Indonesia, Great Britain, Azerbaijan, Brazil and Norway. Meanwhile, OPEC adds that production forecasts in the United States and Canada have been revised upwards compared to the previous estimate due to higher-than-expected volume in the second quarter of 2021. In 2022, according to the report, oil production outside the organization will grow by 2.1 million barrels per day. OPEC is still waiting for a reduction in oil production in the United States in 2021 to 11.2 million barrels per day. According to the alliance, in 2020, oil production in the United States decreased by an average of 0.93 million barrels per day - to 11.31 million barrels per day.
In the near future, there will be a shortage in the oil market, so the price of WTI will rise to about $85 per barrel, Citibank predicts. Moreover, this will happen regardless of any OPEC+ decisions, including the deal with the UAE. According to the bank's analysts, the alliance's policy is ineffective and unable to solve the problem of oil shortage this summer. Most of the deliveries are scheduled until the end of August, and the shortage of oil will continue, even if the tankers will be able to transport more fuel on board.
As for the conflict between the UAE and OPEC+, the alliance may agree to increase the country's base production volume to 3.65 million barrels per day from May 2022. This is 450,000 barrels higher than the current level, but still below the 3.8 million that the UAE insists on. All this is likely to provoke a price increase in the short term. But in the future, this may become a negative factor for the markets, as the US shale industry is already beginning to show signs of recovery.
In the forecast for the coming week, I expect an increase in the price of WTI oil to the levels of 71.25, 71.50, 71.80, 72 and 72.50 Dollars per barrel.