The group of 23 nations, known as OPEC+, agreed Sunday to increase production by 400,000 barrels each month beginning in August. The output hike will continue through September 2022, at which point the entirety of the nearly 6 million barrels per day the group is still withholding will be back on the market. The announcement came after the group’s initial meeting July 1 fell apart amid a disagreement between Saudi Arabia and the United Arab Emirates over the latter’s baseline production quota. “We view [Sunday’s] deal as supportive to our constructive oil price view with supply increasingly becoming the source of the bullish impulse and evidence of non-OPEC supply shortfalls likely in the coming months,” Goldman Sachs said in a note to clients. The firm pointed to discipline among U.S. producers as providing a floor for oil prices, although it noted that the delta variant could lead to price gyrations in the coming weeks.

OPEC+’s July meeting ending without an agreement sent the oil market into turmoil because it opened the door for the group to potentially disband, with each nation pursuing an independent production policy. “This was a renewal of OPEC+ vows,” RBC’s Helima Croft said Monday on CNBC’s “Worldwide Exchange.” “We think the market can absolutely absorb the additional 400,000 barrels per month…this is a constructive agreement.”

Energy stocks moved lower on the heels of oil’s decline. The group dipped 4.5%, making it the worst-performing S&P 500 sector. Occidental, Diamondback Energy, Schlumberger and Marathon Oil were among the biggest decliners, each falling more than 6%. Despite Monday’s downturn some Wall Street firms believe a tight market will continue to support prices. Credit Suisse raised its forecasts Sunday night and now sees Brent averaging $70 per barrel in 2021, up from a prior estimate of $66.50. The firm raised its WTI forecast to $67 for the year, up from $62.

Citi, meanwhile, sees Brent and WTI climbing to $85 or higher this year. “The summer season for petroleum markets should be stronger than usual this year on pent-up leisure demand,” the firm said in a note to clients. “With oil demand growth outpacing supply growth in the near term, we still expect a tight summer, which should boost oil prices,” added UBS. The firm envisions Brent climbing to $80 before retreating to $75 by the end of the year. Even with Monday’s drop, WTI is still up 38% for the year amid a recovery in demand as worldwide economies reopened, and as producers kept supply in check. In April 2020 OPEC+ implemented historic cuts of nearly 10 million barrels per day in an effort to support prices as demand for petroleum products plunged. WTI briefly traded in negative territory for the first time on record.

As oil prices have returned to pre-pandemic levels, fuel prices have jumped. The national average for a gallon of regular gas stood at $3.17 on Monday according to AAA, up 97 cents over the last year.

″[Sunday’s] deal will likely please the White House, which has worried not only about the impact of higher gasoline prices on US consumers but also about a major rift between its key regional allies as it seeks to build a grand producer coalition to tackle climate change,” RBC’s Croft said Sunday in a note to clients.

Oil declined the most this week since March as a resurgence of Covid-19 threatened the outlook for global fuel consumption in the near-term. Futures in New York edged up on Friday but settled 3.7% lower for the week. The rapidly spreading delta variant is triggering renewed restrictions on movement as it sweeps across the globe. The U.K. is considering stricter measures due to a surge in cases, Singapore is shutting hundreds of nightlife venues, and in the U.S., a mask mandate has been reinstated in Los Angeles County.

At the same time, crude markets face the prospect of extra supplies from the OPEC+ coalition, as the United Arab Emirates and Saudi Arabia repair a rift that has stymied the group’s decision-making process. A stronger dollar has also dimmed the appeal of commodities priced in the U.S. currency this week. “It was a one-two punch for the petroleum complex this week: the compromise agreement between OPEC+ and the U.A.E. signaled that more supply will be forthcoming to the market, after all,” said John Kilduff, a partner at Again Capital LLC. “The other factor is the impact of COVID-19 delta variant, which is a threat to the pace of demand recovery.” Despite the pullback, crude has surged about 13% over the last three months as a global vaccine rollout helps restore economic activity. Forecasters from the International Energy Agency to Citigroup Inc. predict that the market will get tighter in coming months.

Still, concerns over demand in the near-term are causing the structure of the U.S. crude market to weaken. While there’s still a premium on the most immediate contracts — a condition known as backwardation that signals tight supplies — it has eased significantly in some parts of the forward curve. The prompt premium is at just 25 cents a barrel on Friday, from 75 cents a week ago. “If in the coming weeks, places that have re-opened start to back-peddle,it will be read as negative for oil demand,” said Leo Mariani, an analyst at KeyBanc Capital Markets Inc.

Meanwhile, investors are gearing up for expiration of the Nymex August futures contract on July 20, with open interest, which reflects the quantity of contracts held at the end of the trading day, declining more than 60% since the beginning of the week. Traders are awaiting a meeting date to be set among OPEC+ producers after signals earlier this week of progress made between the UAE and Saudi Arabia in resolving its standoff. Last week, OPEC and its allies were forced to abandon a tentative deal to boost oil production in monthly installments of 400,000 barrels a day because of last minute objections from the UAE.

Oil declined amid a stronger dollar and after OPEC+ signaled it may revive output soon. Futures in New York slid as much as 2.2% on Thursday with a rising U.S. dollar reducing the appeal of commodities priced in the currency. Traders are watching to see whether the OPEC+ alliance sets a date to formalize a deal to hike production after delegates said Wednesday the United Arab Emirates made significant progress in resolving its standoff with Saudi Arabia. In the U.S., an inventory report this week showing expanding fuel supplies and crude production also weighed on prices. From a purely fundamental perspective, an expected increase in OPEC+ supply is bearish for crude oil, said Ryan Fitzmaurice, commodities strategist at Rabobank.

Crude has rallied nearly 50% this year as economies across the globe reopen and demand returns. Citigroup Inc. said the oil market is expected to be tight in the near-term and should push Brent prices into the mid-$80s, despite any compromise supply deal between the UAE and OPEC+. The Organization of Petroleum Exporting Countries published its first detailed assessment of 2022, in which it forecast that global oil demand will steadily recover to surpass pre-pandemic levels in the second half of next year. However, it also pointed to a lull in the first quarter.

WTI’s prompt time spread has fallen to about half of levels seen at the beginning of July as U.S. government data shows domestic crude production is rising. The spread’s backwardation — indicating tighter supplies — is fading with output currently at the highest since May 2020. Currently, the August U.S. oil futures is trading at the smallest premium to the September contract in four weeks.

Meanwhile, Saudi Arabia and the UAE appear to be closing in on an agreement to revise Abu Dhabi’s production quota, it would still need to be ratified by the whole group before they can salvage plans to revive halted supply. Goldman Sachs Group Inc. said an accord would be a “bullish catalyst”, and would help remove the low risk of a potential price war. The two sides haven’t fully resolved their differences and talks are ongoing. There are signs other members of the alliance have been inspired to air their own grievances, with Iraq now seeking a higher baseline for its cuts too. That said, “the alliance needs to maintain supply management and discipline through next year” if it wants to avoid a potential glut, JPMorgan Chase & Co. analysts including Natasha Kaneva said in a note.

Oil’s rally fizzled as a build in U.S. fuel inventories and a potential OPEC+ agreement to increase supply cooled a buying spree that had pushed the market above $75. Futures in New York fell 2.8%, the most since May. Both gasoline and distillate inventories rose last week, according to a U.S. government report. Meanwhile, Saudi Arabia and the United Arab Emirates were said to resolve the standoff that has prevented OPEC+ from satisfying growing demand for extra barrels. Technical indicators also showed crude close to overbought territory earlier Wednesday, which signals oil may be due for a pullback. With the prospect of more supply from OPEC+ and crude nearing overbought levels, “it’s not surprising to see it down,” said Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC.

Economic recovery in countries like the U.S. and China has increased fuel consumption over the course of this year, propelling oil prices forward by more than 50%. Rising demand, especially during the peak summer travel season in the U.S., drew warnings about a deepening supply deficit after OPEC+ talks on a production hike broke down earlier this month.

The latest breakthrough proposal involves a higher output quota for the UAE, which said OPEC+ talks are ongoing. It would need to be approved by all OPEC+ members before it can take effect. If the compromise is ratified at a new meeting, it could open the way to higher output, although some members have already locked in most of their supply volumes for August. The 23-nation coalition is aiming to restore supplies in installments of 400,000 barrels a day through to late 2022. “So far it’s been proven that the OPEC+ agreement has been effective at stabilizing oil prices,” said Rob Thummel, a portfolio manager at Tortoise, a firm that manages roughly $8 billion in energy-related assets.

The impasse introduced volatility in the market over the last week while near-term supply remained in question. In addition to gasoline, a boom in durable goods is driving demand for naphtha to make plastics as well as diesel to power deliveries. Domestic crude supplies tumbled for the eighth straight week, according to the weekly report. Inventories at the nation’s largest storage hub in Cushing, Oklahoma, fell by 1.6 million barrels.

Still, the ongoing spread of the delta variant casts a shadow on the demand outlook for oil. Daily cases in Indonesia surpassed those in India, and Australia’s most populous city, Sydney, extended a lockdown for two more weeks. Cases in Malaysia and South Korea reached record highs. “Trouble is brewing for the oil market,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd. “Fears are mounting that rising Covid-19 Delta cases could delay a full economic recovery. This, in turn, poses a significant threat to oil demand growth in the near-to-medium-term.”

Oil rose to the highest price in more than 2 1/2 years as prospects of an imminent flood of crude exports from Iran and other major producers waned while the International Energy Agency warned of a deepening supply crunch.

Futures in New York advanced 1.6% to close at $75.25 a barrel on Tuesday, the highest settlement since October 2018. Crude supplies are set to “tighten significantly” amid a deadlock among members of the OPEC+ alliance, the IEA said in a report. Meanwhile, a stalemate over whether to revive the Iranian nuclear deal has reduced the threat of a deluge of the nation’s crude onto global markets. “The supply-deficit story is reasserting as the primary driver,” said Ed Moya, senior market analyst at Oanda Corp.

Futures clung to gains after the industry-funded American Petroleum Institute was said to report U.S. crude supplies fell 4.08 million barrels last week and inventories declined at the nation’s biggest storage hub at Cushing, Oklahoma. Oil prices have surged more than 50% this year as vaccination rollouts accelerated the reopening of economies, boosting fuel consumption. OPEC and allied crude producers have supported prices by taking a gradual approach to resurrecting shuttered supplies. The oil consortium has been deadlocked on increasing production as the dispute between the United Arab Emirates and Saudi Arabia persists. Both countries have locked in stable crude output for next month. “Even if OPEC decides to raise output in August, that crude will not reach refineries until after the August peak-demand period will be over,” Ed Morse, head of commodities research at Citigroup Inc., said in an email.

Nuclear talks between world powers and Iran are unlikely to resume until after the Islamic Republic installs its new president next month, all but eliminating the chances of an early revival of the accord that could trigger a jump in Iranian oil exports. Still, the demand rebound is imperiled by the swift spread of the Covid-19 delta variant, which is forcing restrictions on work and mobility as it spreads through a largely unvaccinated Southeast Asia. Indonesia, Southeast Asia’s biggest economy, is being wracked by a particularly brutal wave of the pandemic, prompting restrictions in the industrial heartland of Java and the tourist enclave of Bali. Malaysia is still in the midst of a nationwide lockdown, while Thailand has just stepped up limitations.

The API also reported gasoline supplies fell 1.54 million barrels last week and distillate inventories rose 3.7 million barrels.

Have a Great Day,

Oil dipped as traders grappled with the demand implications of a Covid-19 resurgence in several regions and slowing economic growth in China. Futures in New York fell 0.6% on Monday. New mobility restrictions have been introduced in parts of Japan, South Korea and Vietnam to curb the spread of the delta variant, clouding the demand outlook for oil. Confirmed Covid-19 cases in the U.S. soared 47% in the week ending Sunday, the largest weekly rise since April 2020.

Meanwhile, China’s economic rebound is reported to have slowed. A stronger U.S. dollar also weighed on prices, making commodities priced in the currency less attractive. “As the Covid-19 variant continues to hit Asia hard, which is really the key swing demand center, that’s a big, big negative for the complex,” said John Kilduff, a partner at Again Capital LLC. Rebounding fuel consumption in economies such as the U.S. and China has boosted oil prices this year amid tight global supplies. Now, the spread of the delta variant is threatening the demand recovery, while OPEC+ remains in a stalemate over near-term production. China’s growth eased in the second quarter to 8% from the record gain of 18.3% in the first quarter, according to a Bloomberg poll of economists. Retail sales and industrial production are expected to moderate, too.

The delta variant continues to spread around the world. In Europe, officials in the U.K. and France are issuing warnings about new cases and reopenings. Anthony Fauci, the top U.S. infectious disease specialist, said “ideological rigidity”.  is preventing people from getting Covid-19 shots and voiced frustration at the struggle to boost vaccination rates in parts of the country. “The market’s obviously concerned on future demand prospects when you do see the virus variant raging in a lot of key locations,” said Ryan Fitzmaurice, commodities strategist at Rabobank.

On the supply side, OPEC and its allies have been unable to agree on an output increase, creating swings in the market and pushing crude to its first weekly loss since May last week. The OPEC+ alliance abandoned meetings last week after a dispute between members over production cuts, and one week later, no deal is in sight. “That’s certainly a big uncertainty that the market is facing,” said Fitzmaurice. “We’ve seen volatility increase as a result.”

The International Energy Agency will provide investors with a snapshot of the market on Tuesday with the release of its monthly report, while OPEC will release its own monthly report on Thursday.