Brent, the global benchmark for two-thirds of the world's oil, ended trading on Friday up 1.7 per cent to $119.72 per barrel. West Texas Intermediate, the gauge that tracks US crude, was up 1.71 per cent higher and settled at $118.87 a barrel. Both benchmarks gained more than 3 per cent for the week.
The Opec+ super group agreed on Thursday to increase its July and August output to 648,000 barrels per day, boosting supply by about 50 per cent. This will bring an additional 216,000 bpd on top of its scheduled 432,000 bpd coming to the market next month. The increase will be divided proportionally among members of the alliance.
Despite falling from a near $140 a barrel high in March crude prices went above $123 a barrel this week. Both key oil benchmarks have gained more than 70 per cent since last year.
While the Opec+ production increase "is in some ways an acknowledgement of the need to raise output at a faster pace given how tight oil markets are ... a nominally higher target serves more as an attempt to talk the market down as there is a low chance most members will be able to hit their new higher targets," said Edward Bell, senior director of market economics at Emirates NBD.
The oil market remains tight and prices high given the supply shortage and rising demand as the US and Europe head into the summer season, China emerges from strict lockdowns and the EU moves ahead with a ban on most of Russian crude oil imports in response for its military offensive in Ukraine. Underinvestment in the energy industry has also inflated oil prices.
"Opec+ surprised markets, which had anticipated it would stick to the current deal," said Giovanni Staunovo, commodity analyst at UBS.
"The group was already struggling to add production in line with the deal in recent months, and many Opec+ member states have already hit their capacity limits. That means effective production increases will likely be about half of the target increase, with not many additional Opec+ barrels hitting the market as a result of a faster unwinding of production cuts."
Saudi Arabia, the world’s biggest oil exporter, the UAE and Iraq are among the members of the group that have capacity to boost output.
Saudi Arabia, which produced 10.4 million barrels of crude oil per day in April and 10.3 million bpd in March, has a production capacity of 12 million bpd. The kingdom is expected to have output of 11 million bpd in August, Mr Staunovo said.
As Opec+ has "fully unwound the production cuts this summer, it can now address potential Russian oil disruptions due to sanctions. That said, the group’s spare capacity is dwindling, with limited volumes to tackle larger disruptions" he said.
While the Opec+ output boost was welcomed by the White House, which is fighting 40-year high inflation, the latest data from the Energy Information Administration on Thursday showed US crude oil inventories fell by about 5.1 million barrels to 414.7 million barrels, below the five-year average.
Looking ahead, this means WTI crude prices are likely to remain high as the market remains tight as consumption rises.
US crude production is about 11.9 million bpd and "with hurricane season now here, it is hard to imagine anyone becoming overly aggressive with a call for a major pullback with oil prices" said Edward Moya, a senior market analyst at Oanda.
Ehsan Khoman, director of emerging markets research for Europe, the Middle East and Africa at MUFG Bank said "capacity matters much more than Opec+ monthly baselines, and we are nearing threshold wherein a small temporary supply disruption could cause acute asymmetric price risks to the upside".
Oil markets will tighten further over the summer and as China emerges completely from its Covid-related lockdowns, Jeff Currie, the global head of commodities research at Goldman Sachs said in an interview with Bloomberg Television.
The Opec+ approved production increases "doesn't materially change anything" he said.