LONDON (BLOOMBERG, REUTERS) – Brent oil rose above US$77 a barrel for the first time since 2018 after Opec+ nations called off talks on output levels, leaving the market with tighter supplies than expected.

The group’s oil ministers were unable to reach a compromise during talks on Monday (July 5), keeping current production limits in place for next month and depriving the market from the extra barrels it needs as demand recovers from the Covid-19 pandemic.

“As things stand now, this is quite a bullish scenario for oil prices,” TD Securities analyst Daniel Ghali said by phone. “We should see the energy market tighten up at a faster pace than we anticipated in recent months.”

Brent was up 94 cents, or 1.2 per cent, at US$77.11 a barrel by 1652 GMT, trading around 2½-year highs. United States oil gained US$1.11, or 1.5 per cent, to US$76.27 a barrel.

Opec+ ministers abandoned the talks and set no new date to resume them, after clashing last week when the United Arab Emirates rebuffed a proposed eight-month extension to output curbs.

The Organisation of the Petroleum Exporting Countries (Opec) and its allies, a group known as Opec+, agreed on record output cuts last year to cope with a Covid-19-induced price crash.

The producers have been gradually easing the output restrictions, but a plan on Friday to lift output by about two million barrels per day (bpd) from August to December this year and to extend the pact on a series of gradual output shifts to the end of the following year was blocked by the UAE.

The prospect of Opec+ not adding the extra barrels to the market next month boosted prices, but also added volatility, said Rystad Energy oil markets analyst Louise Dickson, noting that prices briefly turned negative.

“The fact that the meeting got postponed today and the time it took for this to be announced shows that there are some negotiations on the sidelines,” she said.

ING Economics said Opec+’s failure to come to a deal may provide some brief upside to oil prices but said “it could also signal the beginning of the end for the broader deal, and so the risk that members start to increase output”.

The failure by the group to increase supply will further squeeze an already tight market, raising concerns over inflation.

Most Opec+ members backed a proposal to increase output by 400,000 barrels a day each month from next month, and push back the expiry of the broader supply deal into the end of next year. To agree to an extension, the UAE sought to change the baseline that is used to calculate its quota, a move that would allow it to boost daily production by an extra 700,000 barrels.

Crude rose for a third month in June as widespread Covid-19 vaccinations have helped revive demand while Opec+ has curbed supply. But prices at the highest in more than two years have raised worries over its impact on the global economy, and the White House is already voicing concern about rising gasoline prices.

While demand signals are strong in Europe and the US, the virus is spreading again in parts of Asia, resulting in increased restrictions on movement.

Morgan Stanley estimates global daily oil demand is set to increase by three million barrels from the May-June period to December. With little supply growth elsewhere, even the proposed increase from Opec+ will likely keep the market in deficit. That will support Brent prices within the bank’s forecast range of US$75 to US$80 a barrel in the second half of this year.