Oil declined after OPEC+ agreed to boost production into next year, resolving a bitter internal dispute that had shaken the alliance with a pledge to restore millions of barrels of crude output to the energy market.
Global benchmark Brent and West Texas Intermediate each shed 1 percent. OPEC and allies would add 400,000 barrels per day each month from next month until all halted output is revived.
The deal also gives Iraq, Kuwait, Russia, Saudi Arabia and the United Arab Emirates (UAE) higher baselines against which cuts are measured from May next year. At the same time, a surge in virus cases from the US to Asia threatens to set back the demand recovery.
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The complex pact, announced at the weekend after a spat between Saudi Arabia and the UAE, gives traders a better view of how quickly the cartel would restore the 5.8 million barrels per day it is still withholding, since making deep cuts last year in the initial stages of the COVID-19 pandemic. It also resolves longstanding grievances that tested the unity of the alliance.
After soaring 45 percent in the first half, Brent hit a turbulent patch this month. The heated wrangle at OPEC+ spurred confusion among investors about the group’s plans for output just as the spread of the Delta variant of SARS-CoV-2 sowed concern about the potential impact of fresh outbreaks on demand.
Still, with stockpiles being drawn down, market watchers including the International Energy Agency have said that additional barrels were needed to plug a projected shortfall.
“The deal reached over the weekend is likely to lead to some further weakness in the short term, as investors unwind positions on the prospects of higher supply,” said Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group Ltd.
Ultimately, the market is still relatively tight, which should see a relatively short-lived sell-off, he said.
While the OPEC+ agreement spans more than a year and covers millions of barrels of production, it remains a flexible arrangement.
The alliance would continue to hold talks every month from September, including a review of the market in December.
It could adjust the schedule if required, Saudi Arabian Minister of Energy Prince Abdulaziz bin Salman said.
The next gathering is on Sept. 1.
Goldman Sachs Group Inc said that the deal would support its constructive view on oil, while cautioning that near-term prices might “gyrate” amid concern about the Delta variant. The group’s planned increase in supply was “moderate” and would keep the market in deficit, the bank said in a report.
The Delta variant is still on the ascendant, especially among the unvaccinated, with some countries reimposing curbs. In Asia, Indonesia, Singapore, South Korea, Thailand and Vietnam are all dealing with outbreaks. Elsewhere, US infections are set to surge 65 percent in the week to Sunday, outpacing a 19 percent global rise in cases, while the UK on Saturday reported the most cases since January.
Overall, global demand is holding up as restrictions ease despite increasing virus cases across Asia, Hynes said.
This should keep demand strong even as the market remains cautious as to how long this can last, he added.
Oil traders would also be on alert in the coming days for Iran’s first crude export from outside the Persian Gulf and beyond the Strait of Hormuz. The Islamic Republic plans to ship a cargo of crude from Jask in the Gulf of Oman, said Vahid Maleki, director of the Jask Oil Terminal.
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