Oil prices surged to their highest level in over six years Tuesday after production talks broke down between OPEC and its allies.
West Texas Intermediate crude oil, the U.S. benchmark, on Tuesday climbed by as much as $1.82 to $76.98 a barrel, the highest since November 2014, before paring its gains. Brent crude oil, the international standard, neared $78 a barrel for the first time since October 2018. Both energy components reversed into negative territory later in the session.
Talks between the so-called OPEC+ group, consisting of OPEC members and their allies, called off output talks after the United Arab Emirates rejected a proposed eight-month extension to output curbs. The UAE, the world’s fourth-largest producer, wanted to pump out more of its oil under any agreement.
"The spat between the UAE and Saudi Arabia came out in public making it evident that a rapid de-escalation was not possible," said Sebastien Galy, a Luxembourg-based senior macro strategist at Nordea Asset Management.
Galy believes crude oil prices are likely to stay elevated as the market realizes a deal is at least another two to three weeks away.
Even when a deal is reached, prices could remain strong as the world continues to reopen from COVID-19 lockdowns and production remains 5.8 million barrels per day below pre-pandemic levels.
U.S. shale has been slow to return as producers have "been reluctant to spend capital" because they haven’t been getting a return on their money, said Andrew Lipow, president of the Houston-based oil consulting firm Lipow Associates.
Longer-term, the Biden administration’s attack on fossil fuels will "impact the market in the coming years," Lipow said. Biden has during the first six months of his presidency taken several steps to slow U.S. fossil fuel production, like limiting drilling in Alaska, the Permian Basin and the Gulf of Mexico.
The push for clean energy has many investment firms moving toward environmental, social governance and corporate investing and away from fossil fuels, leaving limited capital for discovering new oil.
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A number of investment banks, including Goldman Sachs, have warned that oil prices could top $100 a barrel next year.
"As we approach $100, it tends to stay there for a period of time until new production comes online to satisfy that increased demand," Lipow said. "And as we've seen, it can take a long time to bring new production online."