The OPEC Plus drama is over and the group decided to leave the market with just enough oil to get by, says Phil Flynn of the PRICE Futures Group.

OPEC Plus agreed to raise oil production but on the face of it, would barely be enough oil to keep up with demand. The deal should have supported oil, yet more concerns are being raised about the delta variant of the coronavirus. This is a highly contagious variant that was first identified in India in December. It is now causing a risk-off situation that is weighing on global markets.

OPEC Plus did get their act together in a deal that saved the market from fears of a production war. They announced that they would extend the decision of the 10th OPEC and non-OPEC ministerial meeting (April 2020) until December 31, 2022. OPEC said they would adjust upward their overall production by 0.4 mb/d monthly starting August 2021 until phasing out the 5.8 mb/d production adjustment, and in December 2021 assess market developments and participating countries’ performance. They will continue to adhere to the mechanism to hold monthly OPEC and non-OPEC ministerial meetings for the entire duration of the declaration of cooperation to assess market conditions and decide on production level adjustments for the following month and endeavor to end production adjustments by the end of September 2022, subject to market conditions.

Effective May 1, 2022, OPEC will also adjust the baseline for the calculations of the production adjustments. They also reiterated the critical importance of adhering to full conformity by taking advantage of the extension of the compensation period until the end of September 2021. Compensation plans should be submitted under the statement of the 15th OPEC and non-OPEC ministerial meeting. The meeting decided to hold the 20th OPEC and non-OPEC Ministerial Meeting on September 1, 2021.

While some people think this increase in production is the reason why oil is down, that’s not the truth of the matter. The unity within the OPEC Plus cartel is very bullish for prices, and the number of barrels that they're adding to the global market is very small and just enough to get by. 

Still, it won't matter if we see economies shut down because of this coronavirus delta variant. Scattered reports of an increase in hospitalization in some states, and reports of the virus spreading are getting traders nervous to start the week. Oil prices are below the lower Bolinger band, and we haven't seen that for some time. We are almost below that technical indicator that we've been looking at since last November. That means we're either extremely oversold, or the market is getting ready for a major breakdown. At this point, we don't expect a major breakdown of the price of oil unless you think the global economy is getting ready to collapse. The only way that we think it's going to collapse is if the delta variant starts to shut down worldwide economies again.

Natural gas is showing some strength as the summer heat hits big parts of the country and support is coming from strong international LNG demand.

Grain prices are also getting concerned about another blast of hot weather as drought conditions in some parts of the country and too much rain in other parts of the country is stressing US crops. The carryover for many grains is the tightest it's been in over 10 years and there is concern that if we don't have a bumper crop, prices could spiral out of control.

Learn more about Phil Flynn by visiting Price Futures Group.