OPEC+ summit could lead to a modest rise in oil output

The OPEC+ group of oil-producing countries is to meet Thursday and are expected to agree to boost output in August to meet demand and limit recent price rises. The cost of crude oil has surged back to levels last seen in October 2018, which would normally support arguments in favour of boosting production.

India, the world’s third-largest consumer of crude, has urged OPEC+ to phase out its current regime of cuts and allow prices to fall as inflation pressure threatens to hobble economic recovery. To begin with, OPEC members led by Saudi Arabia are to confer Thursday via a teleconference scheduled to begin at 1100 GMT.

Four hours later they are to be joined by 10 allied oil-producing countries led by Russia. Since 2016 the alliance has voluntarily reduced oil output to maintain prices, in particular since the coronavirus epidemic struck last year, demolishing global demand for oil.

Since April 2020, millions of barrels of crude oil have intentionally been left untapped, a prudent strategy that Stephen Brennock, an analyst at PVM, says “has thus far been spot on”.

“It has managed to restore the oil balance without over-tightening the market,” he noted.After plummeting in the early stages of the Covid-19 pandemic, oil prices have rebounded to around $75 a barrel for the two leading oil contracts, North Sea Brent and West Texas Intermediate (WTI).

Oil traders, therefore, expect OPEC+ to maintain its overall strategy, and many look for a modest increase of around 500,000 barrels per day starting in August.

That would mean getting Russia on board, as Moscow is keen to maintain its market share and would also like to sell more oil to boost its resource-rich economy.OPEC+ members are already benefiting from the increase in prices, but if they rise too much, it will encourage competitors to tap sources that are not subject to the alliance’s output quotas.

According to Commerzbank analyst Eugen Weinberg, “there appears to be a lack of agreement between the two leading nations in the alliance, Russia and Saudi Arabia, about whether production should be further increased in August, and if so by how much.”Even though Russia wants to pump more oil, outbreaks of the coronavirus’ Delta variant could put a damper on demand in many parts of the world, including Russia itself. On Wednesday, the country posted a record number of Covid-19 related deaths for the second straight day.

The spread of the highly contagious Delta variant has led to fresh restrictions being imposed in Australia, South Africa, and Thailand. OPEC secretary-general Mohammed Barkindo thus mentioned “lingering uncertainties” hanging over oil markets as he chaired a technical meeting Tuesday in preparation for the summit. Since December the OPEC+ countries have met each month to calibrate their strategy as closely as possible to the latest developments. They is also tracking political developments concerning Iran, a key OPEC member. Tehran is under a US-led embargo that hampers its oil sector as talks try to salvage a 2015 nuclear deal that could see Iran eventually able to export substantially more than it does now.

That would likely force other major oil producers to adjust their output levels in turn.