Opec+, the super group of oil producers, agreed to stick to its output plan of adding 648,000 barrels per day of crude to the market in August as supply remains tight, amid mounting fears of a global recession and increasing geopolitical tensions that could dent demand.
The group, which earlier this month agreed to increase its July and August output by about 50 per cent, took the decision during an online meeting on Thursday.
The move came “in view of current oil market fundamentals and the consensus on its outlook”, it said in a statement.
Opec+ also confirmed that it will meet again on August 3 to discuss market dynamics.
The producers’ alliance agreed in its June 2 meeting to bring an additional 216,000 bpd on top of the scheduled 432,000 bpd coming to the market in July and August amid a supply crunch and demand for crude staying at pre-pandemic levels.
Growing uncertainties about the global economic outlook and the Russia-Ukraine conflict have added to oil price volatility in recent weeks.
The latest output increase fully restores the 5.8 million bpd output that was cut during the Covid-19 pandemic.
The current Opec+ agreement on production adjustments is due to end in September this year and from then on group members can adjust their output in line with their view of market conditions.
However, the critical question is what the group will do after August, and the market is closely watching any discussions on crude output in September and beyond, said Edward Bell, senior director, Market Economics at Emirates NBD, and Thirumalai Nagesh, an economist at Abu Dhabi Commercial Bank.
“Given the commentary from Opec+ ministers over the last several months, we would expect further co-operation to persist after September, even if a formal integration of core Opec and Opec+ countries is still viewed as unnecessary,” Mr Bell said.
“While the prospect of Opec+ producing at full tilt post-September may be welcomed by a global economy reeling from currently high energy inflation, there is a major difference between what can be agreed and what can actually be achieved,” he added.
Oil prices have remained volatile this year as Russia’s military assault on Ukraine continues. Global recession fears have pulled prices down from their recent highs of more than $123 per barrel.
Oil is heading for its first monthly loss since November, but prices are still more than 45 per cent higher than at the beginning of this year.
Brent, the global benchmark for two thirds of the world's oil, was trading 0.15 per cent lower at $116.08 per barrel at 5.02pm UAE time. West Texas Intermediate, the gauge that tracks US crude, fell 0.51 per cent to $109.22 a barrel.
However, improving demand in China, the world’s second-largest economy and the biggest importer of energy, is an encouraging sign for the market.
Earlier this month, Opec maintained its forecast that world oil demand would exceed pre-pandemic levels in 2022, but said Russia’s military offensive in Ukraine, developments related to the pandemic and inflationary pressures posed a “considerable risk”.
The group maintained oil demand forecast for this year at 3.36 million bpd, unchanged from the previous month's forecast. Global oil consumption in 2022 is projected to average 100.29 million bpd, with demand exceeding 2019 levels by 0.09 million bpd, according to Opec estimates.
Economic uncertainty, however, is mounting around the world amid rising inflation that could affect crude demand.
In April, the International Monetary Fund lowered its 2022 growth forecast to 3.6 per cent from its previous estimate of 4.4 per cent in January. The World Bank also slashed its growth forecast for the global economy for the second time this year.
On the supply side, the market remains tight amid falling crude inventories and limited capacity of Opec+ producers to boost production.
Crude inventories fell by 2.8 million barrels in the week to June 24, far exceeding analysts' expectations in a Reuters poll for a 569,000-barrel drop, according to US Energy Information Administration data.
Suhail Al Mazrouei, Minister of Energy and Infrastructure, earlier this month said oil prices could go even higher as demand in China is likely to recover significantly and Opec+ doesn’t have enough production capacity.
Opec+ was running 2.6 million barrels a day short of its production target, he told the Middle East and North Africa-Europe Future Energy Dialogue in Jordan.
Earlier this week, Mr Al Mazrouei said that the UAE, Opec's third-largest oil producer, is producing close to its maximum oil capacity based on the Opec+ baseline.
The country, which holds about 6 per cent of the world's crude reserves, is producing 3.168 million bpd of oil and is committed to its targets “until the end of the agreement”, he said, in response to recent media reports that claimed some Opec+ producers have spare production capacity.
Underinvestment in the energy industry in a tight market has also contributed to inflating oil prices.
“Globally, we’re running on extremely thin spare capacity — both crude and oil products. Opec+ is mulling firing its last crude production bullets as it runs out of capacity to pump more, whilst refining capacity for oil products (such as diesel, gasoline and jet fuel), which drives the real economy, has declined markedly,” Ehsan Khoman, head of Emerging Markets Research for EMEA at MUFG Bank, said.
Opec+, led by Saudi Arabia and Russia, has been shepherding crude markets since 2016 and achieved a historic reduction of 9.7 million bpd between May 2020 and July 2021.
However, since the beginning of the war in Ukraine in February, the alliance has maintained that the volatility in oil markets was not being caused by fundamentals and blamed higher prices on geopolitical factors beyond the group’s control.
The EU — along with the UK, the US and its allies — has been penalising Russia for its military assault in Ukraine. Earlier this month, the EU approved the sixth round of sanctions against Moscow that aims to eliminate most of its oil exports to the bloc by the end of this year.
Russia is the world's largest energy exporter behind Saudi Arabia, accounting for about 10 per cent of the world’s energy output, including 17 per cent of its natural gas and 12 per cent of its oil.
“Opec countries struggled to meet their production targets last month, pumping around 3 million barrels less per day than their 42 million [bpd] target,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“This means that the supply problems will remain the major headline in [the] oil [market], and the prices will likely push higher unless the recession fears take the upper hand.”
Mr Nagesh of ADCB said: “the actual Russian oil flows to the global economy are also likely to play a critical role in shaping the group output for September and the fourth quarter of 2022".
“We believe that Russia will remain part of the Opec+ agreement, although it could be exempted from the output quotas amidst the imposed sanctions,” he said.
