The Opec+ super group of oil producers agreed to increase its July output to 648,000 barrels per day, boosting supply by about 50 per cent as the EU moves to partially ban Russian fuel imports.
The decision to bring an additional 216,000 bpd on top of its scheduled 432,000 bpd coming to the market next month was made during an online meeting on Thursday. The group will hold its next meeting on June 30 to review market dynamics, it said in a statement.
The alliance also agreed to increase output by 50 per cent to 648,000 bpd in August as supply remains tight and demand for crude continues to grow despite high oil prices.
Saudi Arabia, the world’s biggest oil exporter, and the UAE are among the members of the group that have capacity to boost output. However, the increase will be divided proportionally among the members of the alliance.
The group resolved to “advance the planned overall production adjustment for the month of September and redistribute equally the 432,000 bpd production increase over the months of July and August 2022", Opec said. “July production will be adjusted upwards by 648,000 bpd.”
The group acknowledged rising demand for crude, noting “the most recent reopening from lockdowns in major global economic centres” and said the “global refinery intake is expected to increase after seasonal maintenance”.
Opec+ ministers underscored the importance of “stable and balanced markets for both crude oil and refined products”.
Oil prices have been extremely volatile this year, affected by Russia’s military assault in Ukraine and declining US crude inventories. China, the world’s second-largest economy and biggest importer of energy, has begun to ease Covid-19 restrictions, which bodes well for crude demand.
With declining rates of Covid-19 infections, China has reopened malls and shops in Shanghai, the country’s commercial centre, brightening the prospects for its economy.
Underinvestment in the energy industry in a tight market has also inflated oil prices that hit nearly $140 a barrel in March and went above $123 a barrel this week.
Brent, the global benchmark for two thirds of the world's oil, pared early losses on Thursday and was trading 0.15 per cent higher at $116.50 per barrel at 7.15pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was trading 0.23 per cent higher at $115.50 a barrel.
The Opec+ alliance has resisted calls from the US and G7 to increase production to tame oil prices that have fed inflation, which is at a 40-year high in the US.
Since the beginning of the Ukraine war in February, 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.
The US on Thursday welcomed the decision by Opec+ to increase oil supplies, Reuters cited a White House statement as saying, which also recognised the roles of Saudi Arabia, the UAE, Kuwait and Iraq in securing consensus.
Russian oil output is set to rise in early June compared with its May levels, Reuters cited Russia's Deputy Prime Minister Alexander Novak as telling state media on Thursday. He added that it was important for Moscow to continue co-operating with Opec+.
Mr Novak also said the decision by Opec+ to increase output in July and August instead of September would help to cover rising demand for oil due to seasonal factors.
For several months, Opec+, which has been shepherding oil markets since 2016, has worked to bring back a crude supply that was greatly reduced after the onset of the pandemic in 2020.
The alliance, led by Saudi Arabia and Russia, achieved a historic reduction of 9.7 million bpd between May 2020 and July 2021. However, a Wall Street Journal report earlier this week suggested that Opec+ members are considering exempting Russia from production quotas.
The Financial Times on Wednesday reported that Saudi Arabia has indicated a willingness to compensate for the loss of Russian oil as Moscow faces increasing sanctions from the West, which make it difficult for the country to increase its output.
“Normally, the co-production regime should continue until the end of this year, but it is now possible that the deal ends by the end of September as the quota system doesn’t make sense when Russia is held back from increasing its production due to the fresh European sanctions,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
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.
In April, about 1.5 million bpd of Russian output was expected to be shut-in, the International Energy Agency reported.
From May onwards, the agency said it expected about three million bpd of Russian production to be offline because of international sanctions and a widening customer-driven embargo.
The EU ambassadors have yet to clinch a final decision on approving the sixth and toughest package of sanctions against Moscow that could eliminate most of its oil exports to the EU through a partial ban. They were expected to meet in Luxembourg on Thursday to finalise the agreement.
“Granted, the ban is flawed but it still covers what matters [cutting about 90 per cent of oil imports from Russia to the EU by year-end] and is a much-needed signal of intent,” said Ehsan Khoman, director of emerging markets research for Europe, the Middle East and Africa at MUFG Bank.
Despite efforts by Opec+ to restore crude supply, its production has been consistently lower than the planned increase as a number of countries are struggling to supply their allotted quotas.
The group should have collectively returned 7.4 million bpd of the original 9.7 million bpd of supply cuts by April, but it has managed to return only 4.7 million bpd of that target to the market, a National Bank of Kuwait report showed.
Even if Opec+ members agree to compensate for Russia's production quota, it will not make a material difference to prices at petrol stations — one of the biggest burdens on consumer budgets.
“None of that will alleviate the refining bottleneck/crunch that is causing petrol and diesel prices to soar globally, but it would be a rare piece of good news for the global economy and the inflation fight,” said Jeffrey Halley, senior market analyst for Asia Pacific at Oanda.
“It certainly isn’t in Opec’s interests to send the world into a recession.”
