Family Feud, OPEC style rattled markets on Tuesday as traders finally realised that while the collapse in the latest oil production cap discussions could mean oil at $US80 a barrel and even $US100, it could also see output surge and prices slump.
Goldman Sachs was talking confidently about ‘oil at $US80 a barrel’ in the past couple of days and maintained that it could still get there after Tuesday’s slide.
The realisation that there’s as much downside in the failure of the latest talks as there is upside played out in the way oil prices moved on Tuesday.
Brent crude futures hit a six-year high, then slid sharply, US crude futures touched another two-and-a-half-year high, then slumped.
Brent crude settled down $US2.63 a barrel, or 3.4%, to $US74.53, after hitting a session peak of $US77.84, its highest since October 2018.
In New York West Texas Intermediate (WTI) crude futures settled down $US1.79, or 2.4%, to $US73.37 after touching $US76.98, highest since November 2014.
On Monday, ministers from OPEC+ (which includes the Organisation of the Petroleum Exporting Countries (OPEC), Russia and other producers), abandoned talks after they failed to close the growing divisions between Saudi Arabia, the largest OPEC producer, and United Arab Emirates.
With trading subdued on Monday because of the US holiday, prices rose when trading resumed on Tuesday but then retreated as they focus shifted to the negatives from collapse of the talks.
Traders realised that some OPEC members and smaller non-member producers are desperate for income and could boost output with no cap deal in place.
And down went prices.
“The market is concerned that the UAE will step in and unilaterally add barrels and other people in OPEC will follow suit,” said Bob Yawger, director of energy futures at Mizuho, according to Reuters.
The United Arab Emirates has said it would go along with output increases but rejected a separate proposal to extend curbs to the end of 2022 from an existing April deadline.
Some OPEC+ sources said they still believed the group would resume discussions this month and agree to pump more from August, though others said current curbs might remain in place.
No date for further talks has been announced.
Analysts are watching to see what the global swing producer, the US, does.
After months of subdued activity with production currently around 11 million barrels a day (but over 200 more rigs in use than a year ago), US output can be lifted easily back towards the 2019 record of 13 million barrels a day.
There has been considerable rationalisation in the US shale sector in the past year, debt has been cut and operating efficiencies wrung out of existing assets.
But the US industry knows that every extra barrel they produce will weigh on prices, especially if other OPEC and non-OPEC producers open the taps in coming months.
