Crude prices gained this week despite broad expectations that OPEC+ will implement another production increase when it meets over the weekend. There has been some positive economic news regarding demand. This was also offset by a surprise build in US inventories. However, what seems to be driving crude prices more than anything is, once again, geopolitics.
It was initially reported that Iran would withdraw from inspections on its nuclear facilities by the IAEA, the UN nuclear watchdog. However, the country’s Foreign Minister quickly clarified that inspections would continue. A little while later, the US announced new sanctions targeting an entity that allegedly was smuggling Iranian oil. All of that left crude prices set to be higher going into the weekend with the OPEC+ meeting.
A “Live” Meeting?
Normally, OPEC+ has closed-door arrangements ahead of the official meeting in which the production level is agreed on in advance. This is why often OPEC+ meetings are so brief. However, some comments from Russia about agreeing “at” the meeting left some analysts wondering if this time around the agreement would be “live”. That is, without a pre-agreement.
It’s not unprecedented for production levels to be discussed at the meeting. However, that’s usually a sign of some kind of divergence within the cartel’s consensus. In other words, it could be a sign that more members are disagreeing with the direction things are going. With OPEC+ raising production consistently over the last few months, this implies growing opposition to further quota increases. However, this could be simply a matter of translation from Russian sources, but it’s something to keep an eye on.
Deals and Growth
Markets got some relief earlier this week as the days count down to the July 9th self-imposed deadline by the US to reach trade deals. A second deal, this time with Vietnam, was announced, allowing for a surge in risk appetite. The US’s strong NFP, above expectations, also provided some indications that the economy is improving. And therefore demand for crude, will remain healthy and helped support price gains in the latter half of the week.
China, as the world’s largest crude importer, made a notable contribution when Caixin reported that industrial activity in the Asian giant returned to expansion in June, an unexpected development. If the trade situation is resolved in the coming weeks, the lifting of uncertainty could help expectations for economic growth to resurge along with projections for increased crude demand.
What to Look Out For
In the meantime, there is a strong consensus expecting that OPEC+ will once again agree to raise production by 411K bbl/day when it meets over the weekend. The surprise to the market would be if it doesn’t.
According to reports, Saudi Arabia is attempting to maintain low prices in order to regain market share from US shale producers. However, they reported record-high production in the last month. This strategy might take some time to actually become effective.