OPEC+ in agreement
Saudis, UAE break impasse on August production, supply cuts past April 2022
July 14 was a pivotal day for oil prices.
July 14 marked the solidification of the production accord between Organization of the Oil Exporting Countries and allied producing countries, as Saudi Arabia and the United Arab Emirates reached an agreement to preserve the OPEC+ Declaration of Cooperation.
The agreement meant that the group’s output adjustment for August will be around 400,000 barrels per day, in line with analyst expectations at the time the group went into planning meetings in late June and early July.
The first half of July was mired in uncertainty when OPEC+ meetings were derailed by a spat over production levels, and a proposal to extend OPEC+ oil supply cuts beyond April 2022.
The UAE requested a larger increase in its own production under the supply cut agreement, but Saudi Arabia refused.
An OPEC+ meeting to establish August production levels originally scheduled for July 1 was delayed, extended, and then postponed indefinitely.
The UAE said that the 2018 benchmark date which was used to establish the baseline production levels for the purposes of the DOC doesn’t reflect the UAE’s investments in subsequently installed capacity. As a result, the UAE has been required to shut in a greater percentage of its production capacity relative to other DOC participants.
Under the agreement on the dispute, announced July 14, the UAE baseline will increase to 3.65 million bpd in April 2022 from the current baseline of 3.2 million bpd, according to sources cited by the Wall Street Journal. UAE had asked initially for its baseline to be raised to 3.8 million bpd. Oil markets slid lower on the news.
The market turned sour later in trading and prices nosedived into the close, after U.S. Energy Information Administration data showed declines in implied gasoline demand in the previous week.
Alaska North Slope crude skidded $1.97 to close at $74.65. Brent lost $1.73 to close at $74.76, and West Texas Intermediate plunged $2.12 to close at $73.13.
Bears prevailed, despite a positive supply note in EIA reports that crude stockpiles had declined more than expected, posting an eighth consecutive draw.
Iran sanctions relaxedThe bearish action came on the heels of an unexpected announcement made by the United States, that it was suspending some financial sanctions on Iran.
The State Department told Congress July 13 that it would waive sanctions on Iran’s illicit oil trade to allow the country to access frozen funds from South Korea and Japan.
The waiver, signed by Secretary of State Antony Blinken, allows the “transfer of Iranian funds in restricted accounts to exporters in Japan and the Republic of Korea,” according to a notification sent to Congress by the State Department.
The secretary of state had previously signed a similar waiver to “allow funds held in restricted Iranian accounts in Japan and Korea to be used to pay back Japanese and Korean companies that exported non-sanctioned items to Iran,” a State Department source told the Washington Free Beacon.
“These repayment transactions can sometimes be time consuming, and the secretary extended the waivers for another 90 days,” the spokesperson said.
The State Department said funds will not be released to directly to Iran under the waiver.
“Allowing these funds to be used to repay exporters in these jurisdictions will make those entities whole with respect to the goods and services they exported to Iran, address a recurring irritant in important bilateral relationships, and decrease Iran’s foreign reserves,” the waiver said.
Industrial demand may strain supplyA rolling average of U.S. total oil products supplied lifted to the highest seasonal level in the week ending July 2, based on government data going back three decades.
With gasoline and diesel demand already restored to pre-pandemic levels, the average - an indicator of consumption - was driven higher on a surge of petroleum use in products such as plastic, asphalt, lubricants and other industrial needs, Bloomberg reported July 13.
Recovery in demand for jet fuel continues to lag that of road fuels, but as jet fuel demand comes roaring back, the specter of a supply crunch looms.
Jet fuel use remains 24% below July 2019, suggesting markets could tighten and prices could climb when air travel normalizes.
Petrochemical producers have added plastic manufacturing capability along the U.S. Gulf Coast in the in the decade since fracking technology boosted production of oil, gas, and low-cost natural gas liquids.
In the pandemic, plastic producers were positioned to fill the need for more product delivery packaging, as well as to fill an urgent need to provide protective equipment to health-care workers.
Consumption of more than a dozen products has risen, including butane for gasoline blending, lubricants for heavy equipment, and propane - with Americans grilling at home during the pandemic.
U.S. weekly oil production is near 11 million bpd, about 2 million bpd less than early 2020 levels. Supply is so tight, earlier in July WTI futures rose to the strongest level relative to Brent since October.
Some Rocky Mountain area refiners are scrambling to secure feedstock because production in the region has been the slowest to recover, and inventories at Cushing, Oklahoma, are at the lowest level since March 2020.