OPEC+ Deal Reached

The OPEC+ vs UAE standoff didn't last and without too much drama the dispute has been resolved.

The Opec+ coalition agreed today a deal to boost its collective output by up to 400,000 b/d each month through to the end of next year, after reaching a compromise to adjust five of its members' baseline production levels upward.

Originally set to expire in April 2022, the Opec+ group's decision to extend the deal allows for more time to unwind the 5.8mn b/d that is still being withheld to be unwound in a more gradual manner.

This stepwise increase would theoretically increase the alliance's collective output ceiling by 2mn b/d by the end of the year, and pave the way for the remaining 3.8mn b/d to return by September.

The extension to December, however, would allow Opec+ the option to pause the output hikes for up to three months in response to any abrupt changes in market dynamics ā€” such as a return of Iranian volumes in the event of a lifting of sanctions on Tehran, or the possible emergence of new strains of Covid-19.

(More detail & specifics in the link above)

Key Points

  • OPEC+ is showing solidarity, no price wars or breakup

  • Increase is only on the baselines NOT the actual production & comes into effect from May 2022

  • Speculation of returning 400k b/d was originally seen as bullish for the market, before the UAE news broke.

  • According to OPEC's own monthly report crude markets will be undersupplied by 1.03mln BPD in Q3, and undersupplied by 1.21mln BPD in Q4 šŸ‘‡šŸ‘‡

Newsquawk

Hard to be bearish an under-supplied market.

Next major factors are progress on vaccinations & reopening (demand), and whether DRILL BABY DRILL! (U.S. shale) sees higher prices and starts ramping up production.

Iran might be a factor at some point too.

Overall, there's a clear (and newly reinforced) message that OPEC+ are united and will continue to manage the return of supply to 'normal' levels from 2022.

On those baselines, Iraq & Kuwait also got a little boost. Saudi Arabia & Russia got 500k each, but there are question marks over Russia's ability to reach those production levels.

The highest they have EVER produced was just over 11 million bpd back in December 2018...

Here are the updated baselines šŸ‘‡šŸ‘‡šŸ‘‡

via Amena Bakr

How the oil market responds should be the key driver for markets tomorrow because there's not much else...

Monday's calendar is VERY bare.

Also seeing quite a few notes & posts (from more respectable names) concerned about a lack of breadth in the recent rally and potential risk off sentiment.

This short thread is a good example.

 2/4 its common for market internals to flag concern well before it appears at the surface (i.e. SPX), but it is NOT common for divergences to be so extreme. further, the big divergence is occurring at a time of year known for its seasonal weakness... pic.twitter.com/6PRa8kwFL8ā€” MrBlonde (@MrBlonde_macro) July 18, 2021 

Add in the recent bond moves (flatter curve) and there might be something to it...