The Opec+ super group of oil producers has agreed to increase its September output by a much slower 100,000 barrels per day, as it recalibrated production amid continued price volatility caused by fears of a recession that could dent crude demand and Russia-Ukraine conflict-driven supply constraints.
The decision to bring additional crude to the market was taken during an online meeting on Wednesday. The group will hold its next meeting on September 5 to review market dynamics, it said in a statement.
Opec+ in June agreed to increase its July and August crude production by about 50 per cent to 648,000 bpd, fully restoring the 5.8 million bpd output that was cut during the Covid-19 pandemic.
“The meeting noted the dynamic and rapidly evolving oil market fundamentals, necessitating continuous assessment of market conditions," the Opec statement said.
"The severely limited availability of excess capacity necessitates utilising it with great caution in response to severe supply disruptions.”
Oil prices have remained volatile in recent weeks and fears of a slump in demand have pulled prices down from recent highs of more than $123 per barrel.
Brent, which rose to a notch under $140 per barrel in March after Russia’s military assault in Ukraine, has given up most gains and closed below the $100 per barrel mark on Monday. But despite recent weakness, crude is still about 30 per cent higher since the beginning of this year.
Brent, the benchmark for two thirds of the world’s oil, was trading 3.82 per cent lower at $96.70 per barrel at 10.43pm UAE time yesterday. West Texas Intermediate, the gauge that tracks US crude, dropped 3.98 per cent to $90.66 a barrel.
"The move fell in line with speculation of a small increase leading into the meeting," said Craig Erlam, senior market analyst, UK and Europe, Middle East and Africa, at Oanda.
"Of course, with so many countries failing to hit current targets, and by a distance in some cases, the key factor here will be the make-up of the increase. If spread evenly, the net increase will be much lower as we've seen so often."
The producers' group is unlikely to pump as much as it intends, as many members of the Opec+ alliance have been struggling with capacity constraints for years.
On Wednesday, an Opec communique underscored its "particular concern" that "insufficient investment into the upstream sector will impact the availability of adequate supply in a timely manner to meet growing demand beyond 2023".
The alliance noted that the Organisation for Economic Co-operation and Development commercial oil stocks level at 2,712 million barrels in June 2022 was 163 million barrels lower than the same time last year and 236 million below the 2015-2019 average. Emergency oil stocks have also reached their lowest levels in more than 30 years.
Global oil demand will continue to grow next year, indicating more pressure on an already tight market, with Opec producers required to pump almost 1 million more bpd in 2023.
Only Saudi Arabia and the UAE have any significant capacity to boost production. They have a combined spare oil capacity of more than 2 million bpd, according to the International Energy Agency. However, both countries are already close to the level where they can produce at a sustained pace.
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 been under pressure to raise production. The group has resisted calls from the US and G7 to significantly increase production to tame oil prices that have fed inflation, which has climbed around the globe and is at a 40-year high in the US.
The Opec+ alliance has maintained that the volatility in oil markets was not being caused by fundamentals and that higher oil prices were a result of geopolitical developments.
However, US President Joe Biden, while visiting Saudi Arabia last month, said he expects the group to take “further steps” to boost output. US officials have since signalled confidence that Riyadh will push for an increase in crude production.
Growing uncertainty about the global economic outlook and the continuation of the Russia-Ukraine conflict have added to both demand and supply side concerns in recent months.
The International Monetary Fund now projects global growth at 3.2 per cent in 2022 and 2.9 per cent in 2023, revising it down 0.4 percentage points and 0.7 percentage points from its April forecast, respectively. This compares with a 6.1 per cent expansion last year.
The fund warned if further risks materialise and inflation rises further, global growth could decline to about 2.6 per cent and 2 per cent in 2022 and 2023, respectively, which would put growth in the bottom 10 per cent of outcomes since 1970.
The path for crude markets is less defined in the wake of cloudy growth picture, according to Emirates NBD.
“The demand outlook is particularly hazy given that the US has now recorded two quarters in a row of a shrinking economy — the usual, but not American way of defining a recession — China maintains its strict Covid restrictions, while the eurozone and many emerging economies are struggling under the pressure of tightening monetary policy and high inflation,” said Edward Bell, senior director of market economics at Emirates NBD.
The current Opec+ agreement on production adjustments is due to end in September and from then on, group members can adjust their output in line with their view of market conditions.
Opec+, however, did not say by how much it plans to increase production each month beyond September.
Analysts, meanwhile, expect the super group to stay together beyond this year and continue to co-ordinate on output levels.
Abu Dhabi Commercial Bank expects the target output to remain "steady until end-2022” at about the 800,000 bpd level.
“We believe that Opec+ will tread cautiously and seek a balance between easing oil supply shortages and exhausting limited global spare capacity available,” ADCB chief economist Monica Malik and economist Thirumalai Nagesh said in a report.
“Opec+ is also likely to extend the current agreement that ends in December 2022 by further six to 12 months, in our view.”
Since the beginning of the Opec+ deal, oil prices have rallied more than 330 per cent, from $25 per barrel for Brent futures at the end of April 2020 to $110 per barrel at the end of July 2022, Mr Bell said.
“The improvement in oil prices since the peak of the pandemic should help to keep Opec+ ministers committed to the effectiveness of the alliance and, for now, we see no change coming for [the alliance],” he said.