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Oil Hits Seven-Year High as OPEC Output Talks Collapse, Stockpiles Slump

OPEC talks, aimed at establishing production levels between now and the end of the year, collapsed in acrimony as cartel leaders failed to agree on longer-term output goals.

U.S. crude prices traded at the highest levels in seven years Tuesday after OPEC leaders failed to reach a pact on production limits following a series of stormy debates from the cartel's headquarters in Vienna.

The so-called OPEC+ group, which includes cartel leaders are well as non-member allies such as Russia, entered last week's talks with the aim of paring a years-long agreement on output cuts, which are taking some 5.8 million barrels of crude from the market each day, with the addition of 500,000 barrels a day starting from August.

The breakdown in talks, however, was linked to a broader debate over the long-term fate of the production cut agreement -- first reached in 2016 when oil was trading at $30 a barrel -- which Saudi Arabia wants to extend until at least 2022.

Other members, including the United Arab Emirates, wish to change the baseline of output cuts to 2018 levels, a move that would give them more leeway to actually boost production and take advantage of the uptick in demand expected over the second half of the year.

"The fallout within OPEC+ means increased uncertainty in the months ahead if a quick resolution is not found, which suggests increased volatility in prices," said ING's chief commodity strategist Warren Patterson. "In theory this means that OPEC+ output will remain unchanged in August, which would be bullish for prices in the short term. However, a breakdown in talks puts the broader deal at risk, and so the potential for supply to increase in the longer run".

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WTI crude futures for August delivery, the benchmark for U.S. oil and gas prices, jumped 10 cents higher on the Tuesday session to trade at $76.44 per barrel, the highest level since November of 2014.

Brent crude contracts for September delivery, which are more tightly-aligned to global prices, were marked 26 cents per barrel higher at $77.38 in early trading in New York, the highest since October of 2018.

Exxon Mobil  (XOM) - Get Exxon Mobil Corporation Report shares, meanwhile, were marked 0.85% higher in pre-market trading at $63.70 each while its larger rival, Chevron  (CVX) - Get Chevron Corporation Report, rose 0.8% to $106.95 each. 

U.S. crude stockpiles are declining at a record pace, with Energy Department data showing the Strategic Petroleum Reserve's total falling by 1.15 million barrels per day over the past month. Overall crude supplies fell by 6.72 million barrels last week, the Energy Department said, taking stocks to the lowest levels since March of last year.

Meanwhile, industrial demand is surging: European factory activity rebounded to its strongest pace on record last month and similar all-time highs noted in surveys from the U.S. and Asia.