At face value, OPEC+ inaction should be bullish for crude prices in the short term. After all, the oil market is facing an even bigger deficit than previously anticipated. This narrative was on full display in the early part of yesterday as oil prices continued to hit fresh multi-year highs. Brent came within touching distance of $78/bbl while WTI scrambled past the psychologically significant $75/bbl level and topped out at $76.98/bbl, the highest level since November 2014.

Yet the feel-good factor did not last long. Both crude markers retreated from multi-year highs and settled sharply lower on speculation that the OPEC+ supply cut pact could unravel after members failed to agree limited increases to supplies. This would ultimately lead to more crude and a less stable oil market, the thinking went. In other words, it finally dawned on market players that a rift at the heart of OPEC+ could put downward pressure on oil prices. For all the talk of tightening oil fundamentals, the supply outlook is clouded by uncertainty and such conditions are rarely conducive to a sustained increase in prices.

Away from the OPEC+ spat, the S&P 500 stock index eased back from its latest record highs. Sentiment took a knock after US service sector growth slowed amid shortages of labour and raw materials. Alongside the weaker-than-expected performance was an uptick in input costs. This suggests that inflationary pressures are proving to be more persistent than currently envisioned. Small wonder, then, that the dollar index continued to grind higher yesterday, which in turn should give oil bulls something else to fret about.

Not all for one and not one for all

OPEC and its non-OPEC allies are currently faced with the challenge of how to return around 5.8 mbpd of oil to the market by April next year. But as we wait to see who blinks first in the Saudi Arabia-UAE standoff, others within the group may well jump the gun in boosting output. OPEC+ members are revelling in high oil prices and face a familiar temptation: restore a larger share of production earlier than anticipated in a bid to boost their budget revenues.

Aside from the UAE, the obvious candidate is Russia. So far, the non-OPEC heavyweight is siding with the Saudis though it could jump ship at any time. Russian energy companies are becoming increasingly unwilling to hold back production as prices reached multi-year highs. And there is precedence. Moscow has shown time again that there is an “I” in Russia having consistently pumped above its allocated quota.

In the meantime, the unsuccessful attempts by OPEC+ to reach a deal has may have also paved the way for a return of Iranian barrels. Up until now, the prospect of that happening soon was rather bleak. The recent election of a hardliner president and the lack of a nuclear monitoring agreement between Iran and the UN nuclear watchdog have undermined efforts to find a breakthrough. However, with the oil market facing a deepening supply shortfall, Washington may fast-track its efforts to secure an Iranian nuclear deal and subsequent sanctions relief.

The Biden administration is all too aware of the risks of rising oil prices. Average national gasoline prices are at their highest for this time of the year since 2014 and are forecast to rise even higher later in the summer. One way in which it could limit the upward range of oil prices is to greenlight the return of around 1 mbpd of sanctioned Iranian exports. What’s more, the lifting of oil sanctions could allow the OPEC nation to bring more oil to the market by using its inventories of 60 million barrels.

All in all, there is a very real risk that we could see a flood of new supply hitting the market from within the OPEC+ alliance. The same, however, can’t be said for the group’s main rival: US shale. The sector is still showing little interest in pumping aggressively despite the rise in crude prices. US shale oil producers are sticking to their output discipline and not significantly adding more rigs. Indeed, the rig count has been swinging between weekly additions and declines in recent weeks, according to Baker Hughes data. The same is true of US crude production levels which has see-sawed either side of the 11 mbpd threshold since last November.

Even so, despite the muted threat of a resurgence in US shale supply, OPEC+ must quickly restore unity within its own ranks. Failure to do so risks triggering a domino effect in which the group’s members take it on themselves to unilaterally boost output. Every member of the alliance — led by Saudi Arabia and Russia — has done an impressive job at managing oil supplies as demand has crawled its way back from the biggest collapse in history. To throw it all away now would be madness.