With great uncertainty comes great volatility. This truism was on full display in the oil markets last week. The OPEC+ drama left traders uncertain about the future of oil prices and the alliance itself. The initial reaction to Monday’s breakdown in talks sent Brent to a fresh three-year high while WTI hit its highest level in more than six years. However, the bullish knee-jerk reaction soon gave way to fears that the OPEC spat could lead to some producers unilaterally reopening the taps. Cue a mid-week price rout. A subsequent rebound on Friday could not spare the two crude benchmarks from a weekly loss. Meanwhile, in a further sign of weakness, the prompt backwardation on both crude markers narrowed over the course of the week as confidence in the near-term supply deficit took a hit.

On balance, the market has been a bit negative as of late amid the growing sense that the latest OPEC+ impasse could be a precursor to a pump-and-grab scenario, meaning a lot more oil potentially gets put on the market. If anything, the current OPEC+ deadlock has injected a huge dose of uncertainty into the group’s production path. This, in turn, has left everyone wondering what to expect next. What is known is that the market is clamouring for more barrels. Global inventories are falling as demand surges ahead, and nowhere is this more apparent than in the US. The EIA reported that domestic crude stocks fell for a seventh consecutive week amid a surge in fuel demand in the week to July 2. This was led by gasoline consumption which jumped to a record high of more than 10 mbpd.

But that is not to say that they aren’t any downside risks to the global demand picture. Indeed, there are growing fears over the fast-spreading Delta covid variant. Outbreaks are flaring up in several parts of the world, bringing with it the possibility that lockdowns are going to start back up. Australia and Tokyo both are starting to lock down again and this being the case it could drive down demand for crude oil if this catches on. Meanwhile, finance ministers from the G20 warned that the rapid spread of the Delta coronavirus variant is casting a shadow over Europe’s brightening economic outlook.

Small wonder, then, that hedge funds have gone on the defensive. Money managers cut their bullish positions in the two main crude oil futures contracts in the week to July 6. Bullish bets on combined ICE and CME WTI contracts fell by 34 million bbls or 8%, to a six-week low of 383 million bbls in what was the biggest drop this year. The pullback on ICE Brent was more measured at around 5 million bbls to a five-week low of 303 million bbls. Yet in both cases, this decline was almost exclusively driven by liquidation in long positions. This points to a lack of upside potential. And it should not come as a surprise given that oil prices are at multi-year highs and that bullish drivers are starting to sputter. What’s more, a pullback has been long on the cards given that the number of long positions outnumbered shorts by a ratio of 10 to 1, levels not seen since the end of 2018.

Although bullish sentiment has been somewhat tempered recently, oil prices are still comfortably holding above $70/bbl. Whether this remains so depends wholly on the next move by the OPEC+ alliance. A week on from the collapse in talks and the group is still at an impasse. No date has been set for the next meeting. The longer the standoff continues the harder it will be to resolve the situation. In the meantime, a jump in US crude production has thrown a curveball into proceedings. Latest figures from the EIA showed weekly field production increasing to 11.3 mbpd to mark the highest reading since May 2020. This pick up in US output may spur a greater dissent within OPEC as concerns over market share return to the fore.

All in all, it is hard not to envisage OPEC+ pumping more oil sooner or later. After all, by keeping a tight rein on supply, it risks causing prices to overshoot for a while, which in turn could derail the fragile demand recovery. The key question is whether the group’s producers will loosen the oil spigots in a coordinated or unilateral manner. A betting man would put his money on the former. Indeed, market players are cautiously optimistic that Saudi Arabia and the UAE will eventually settle their differences.  This would pave the way for some much-needed clarity regarding future OPEC+ production and a renewed push towards $80 oil. For now, though, uncertainty is very much the buzzword of the oil market.