Opec+ agreed to stick to its output plan and will continue to add 432,000 barrels per day of crude to the market in June, even as oil prices rise after the EU announced a phased strategy to ban oil imports from Russia by the end of this year.
The 23-member super group of producers, led by Saudi Arabia and Russia, agreed to the modest production increase during an online meeting on Thursday. The group will hold its next meeting on June 2 to review market dynamics, it said.
The group noted that the "continuing oil market fundamentals and the consensus on the outlook pointed to a balanced market" while acknowledging the "continuing effects of geopolitical factors and issues related to the ongoing pandemic".
Brent, the global benchmark for two-thirds of the world's oil, was 1.50 per cent higher at $111.79 per barrel at 4.23pm UAE time on Thursday. West Texas Intermediate, the gauge that tracks US crude, was trading 1.29 per cent higher at $109.20 a barrel.
"We attribute the decision [by Opec+] to stick to the plan and not increase production faster to several factors," said Giovanni Staunovo, strategist at UBS.
"Mobility restrictions in China are weighing on oil demand and likely supported the cautious stance. Russian crude exports in April increased by more than 500,000 bpd versus March, keeping the oil market well supplied for now. And lastly, dwindling spare capacity within the group means that a faster production increase would reduce that spare capacity even more."
Earlier this week, the EU proposed plans to ban Russian oil over the next six months and refined fuels by the end of the year, but the proposal is yet to be officially approved by Parliament.
The bloc aims to agree on the next round of sanctions by the end of the week or by May 9.
“Increased market volatility is to be expected,” Rystad, an Oslo-based consultancy, forecasts.
After a period of lower oil prices, due to Covid-19-related demand downside in China and the mega-Strategic Petroleum Reserve release by the US and the International Energy Agency (IEA) in early April, higher prices could be around the corner, the consultancy said.
"Energy prices remain under a decent positive pressure as the European nations now consider walking away from the Russian oil as the next step of the economic sanctions that they impose on Russia as a result of the war in Ukraine," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
"But the European decision is not Opec’s problem ... On the other hand, the Opec countries haven’t been able to meet the daily quotas over the past couple of months, so it doesn’t really make sense to have quotas in place if the producer countries fall repeatedly behind their target."
For several months, the Opec+ alliance worked to bring back 5.8 million bpd in an effort to restore supply that was greatly reduced after the onset of the Covid-19 pandemic in 2020. The alliance achieved a historic reduction of 9.7 million bpd between May 2020 and July of last year.
But now its task is becoming harder as it needs to decide on the amount of barrels it should bring to the market amid a softening global economy due to the Russia-Ukraine crisis and pandemic-related curbs in China that are derailing economic momentum in the world’s biggest oil importer.
The group increased its monthly quota to 432,000 bpd of crude in May, according to its higher baseline levels for several producers in the alliance. This is about 30,000 bpd more than what had been the monthly target since the third quarter of last year.
However, the coalition has struggled to reach the agreed-upon levels, with Opec+ members producing 1.45 million bpd below their production targets for March.
Following its meeting on Thursday, Opec+ reiterated the "critical importance of adhering to full conformity".
Last month, Opec also lowered its demand and supply forecasts for 2020 due to market uncertainty.
Global demand will rise by 3.67 million barrels per day in 2022, down 480,000 bpd from its previous forecast, the group said. Total consumption is expected to surpass the 100 million bpd mark in the third quarter, as predicted previously by the oil group.
“In 2022, oil demand growth was revised to the downside … accounting for declines in global GDP [gross domestic product] on account of the geopolitical developments and the resurgence of the Omicron variant on global oil demand in China,” Opec said.
Non-Opec supply in 2022 is forecast to fall by 300,000 bpd to 2.7 million bpd due to a decline in supplies from Russia following sanctions, the group said.
“It is vital we have stable energy markets, for both producers and consumers, as exhibited during the pandemic," Opec secretary general Mohammad Barkindo said at the Joint Technical Committee meeting on Wednesday.
"In this regard, we urge global leaders to continue to support the type of multilateralism exhibited in the [Opec+ alliance], to ensure an unhindered, stable and secure flow of energy to the whole world,” he said.
Looking ahead, the outlook for the market remains bullish, although prices may not touch the highs of close to $140 per barrel seen earlier this year, according to Ms Ozkardeskaya.
"The war in Ukraine, the sanctions on Russian oil, combined to capacity restrictions, other disruptions like attacks and social unrest in oil producer countries and the lack of investment should continue increasing the gap between supply and demand and give investors enough reason to remain bullish in oil in the short to medium run," she said.
"But, it also looks like the oil rally will likely remain capped below the $120/$130 area, as above this price range, the slowing demand could also slow the rally. Therefore, levels we saw at the beginning of the Ukrainian war, may be the peak levels."