OPEC + oil deal causes prices to fall, could be a buying opportunity

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Oil well pump jack operated by Chevron Corp. in San Ardo, California, USA, on Tuesday, April 27, 2021.

David Paul Morris | Bloomberg | Getty Images

Oil prices fell more than 2% during the Asia hours on Monday afternoon after OPEC and its allies agreed to end oil production cuts.

Brent crude oil futures fell 2.13% to $ 72.02 a barrel, while US crude oil futures fell 2.09% to $ 70.31 a barrel.

However, for the organization of petroleum exporting countries and its allies – collectively known as OPEC + – a deal is “better than no deal,” according to an oil analyst who said a prolonged stalemate could mean rising production and falling prices.

“I think they decided that a deal is better than no deal,” Andy Lipow, president of Lipow Oil Associates, told CNBC.

The group agreed to increase production by 400,000 barrels per day per month from August as it plans to phase out the production cuts of around 5.8 million barrels per day by September 2022 than two years.

Negotiations to increase production had previously stalled after the United Arab Emirates rejected the group’s proposal to reverse the oil cuts. It left both the industry and investors in the balance as experts warned that without an agreement, prices could either hit the ceiling or plummet.

This agreement should give the market participants consolation that the group is not heading for a messy separation and that the production locks will not open in the foreseeable future.

Helima Croft

RBC Capital Markets

“If they didn’t have a deal, they would be left to their own devices and we could really see one free for everyone if the production of all of them is increased at a time when the return of demand is due to the Delta variant,” said Lipow on Monday across from CNBC’s “Street Signs Asia”.

He was referring to the highly transmissible variant of Covid, which is common in more than 100 countries and which is driving cases to record highs in several countries.

“This agreement should give consolation to market participants that the group is not heading for a messy breakup and will not open the production gates anytime soon,” said Helima Croft, Head of Global Commodity Strategy at RBC Capital Markets.

This is truly a buying opportunity for the next six months as these inventories continue to decline worldwide.

Andy Lipow

President, Lipow Oil Associates

Last year, OPEC and its allies agreed to cut production by nearly 10 million barrels a day from May 2020 to April 2022 to meet lower demand as the Covid crisis hit the economy and people don’t travel much could.

“So we just know that OPEC + didn’t want to see a return to prices between $ 10 and $ 20 a barrel last year,” said Lipow.

Prices fell to all-time lows last year as the effects of the pandemic wiped out oil demand. West Texas Intermediate crude fell below zero for the first time before rebounding to over $ 10 a barrel. Brent oil fell to a nearly two-decade low of nearly $ 20 a barrel.

Time to buy

This could be a buying opportunity for investors, says Lipow.

The “silver lining” is that the pace at which OPEC + is restoring oil production is still slower than the increase in global oil demand, he said. That will push prices up.

‚ÄúReally, this is an opportunity to buy for the next six months as these inventories continue to decline around the world. Here in the United States, we’ve cut our crude oil inventory by 75 million barrels since April 1st, and that’s indicative of what’s happening in the rest of the world. “

Lipow said oil prices for the international benchmark Brent could soar to $ 78 a barrel.

“I still think the world is grappling with a return in demand and this delta variant that is spreading around the world. And of course that is keeping prices down,” he said.

Croft also warned that uncertainty may still be ahead as OPEC could reverse the 400,000 barrels-a-day increase.

“As the Saudi Oil Minister stated, the group can pause, undo or continue the monthly increase of 400 kb / d based on major events like Iran … and global COVID case numbers,” she wrote in a note on Sunday.

The US and Iran are renegotiating a 2015 nuclear deal, which could mean a return of Iranian oil to the market.