Opec+ sticks to output policy amid continued volatility and demand concerns

Opec+ stuck to its production caps on Thursday but the crude producers’ group reiterated that its policy of a gradual unwinding of cuts could be “paused or reversed”.

The eventual decision will depend on market conditions, the 23-member group said as bouts of volatility continue to hit oil markets amid rising geopolitical risks.

“During today's meeting, the member countries that participated in the June 2, 2024 meeting in Riyadh along with Oman, reiterated that the gradual phase-out of the voluntary reduction of oil production could be paused or reversed, depending on prevailing market conditions,” Opec+ said.

In June, the producer alliance agreed to extend output cuts of 3.66 million barrels per day, which were initially planned to end this year, until the end of 2025.

At the same time, the additional 2.2 million bpd voluntary production cuts of eight Opec+ member states were extended by three months until the end of September.

The group also announced in June a plan to gradually lift the voluntary restrictions on a monthly basis from October 2024 to September 2025.

Opec+ said at the time that “monthly increases could be paused or reversed depending on market conditions”.

“The committee will continue to monitor the conformity of the production adjustments decided at the 37th Opec and non-Opec ministerial meeting on June 2, including the additional voluntary production adjustments … and will continue to closely assess market conditions,” the group said.

Opec+ has total production curbs of 5.86 million bpd in place, including a reduction of 2 million bpd agreed on in 2022, and voluntary cuts of 1.66 million bpd, announced in April last year and extended to December 2024.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.26 per cent lower at $80.63 per barrel at 6.41pm UAE time on Thursday. West Texas Intermediate, the gauge that tracks US crude, was down 0.49 per cent to $77.53 a barrel.

Oil prices rose more than 3 per cent on Wednesday following the killing of Hamas leader Ismail Haniyeh in Tehran, which led to concerns of a wider regional conflict.

The assassination of Mr Haniyeh in a guarded guest house in the north of the Iranian capital early Wednesday, came hours after senior Hezbollah commander Fouad Shukr was targeted in an Israeli strike on the Beirut suburb of Dahieh on Tuesday evening.

Iran has threatened “harsh punishment” for Israel, which, it says was responsible for assassinating the Hamas leader.

“How oil prices react on those tensions comes down to the next move of Iran,” Giovanni Staunovo, strategist at UBS, told The National.

UBS still expect prices to move into a $85 to $90 a barrel range for Brent, driven by oil inventory draws.

“Oil demand concerns continue to dominate, and Chinese economic data and weak July Chinese crude imports are not helping, but I believe oil demand growth remains healthy,” Mr Staunovo said.

Despite Wednesday's gains, Brent shed nearly 7 per cent of its value in July amid concerns about China's crude demand outlook.

The world’s second-largest economy is facing challenges with a real estate crisis, sluggish consumer spending, and a deceleration in manufacturing.

China's manufacturing activity fell to its lowest level in five months in July, as factories struggled with decreasing orders and low prices, according to an official survey released on Wednesday.

The National Bureau of Statistics purchasing managers' index contracted for the third consecutive month, dropping to 49.4 from 49.5 in June. This is below the 50 mark that separates growth from contraction.

"The market has moved a lot away from geopolitical impact on oil prices, so [the current increase is] in fact a sizable response to what happened yesterday, but I don't expect this to be a rally," said Iman Nasseri, managing director, Middle East at FGE.

"However, we expected a price correction to come and push the prices towards $85 to $90 range in August, so it could be the beginning of the price correction, and the market will start to basically see the signals in the fundamentals," Mr Nasseri told The National.

Iran's potential retaliation to the Hamas leader's assassination might not significantly affect crude prices because Israel is not a key player in the oil market, Mr Nasseri said.

However, if the conflict escalates and Israel targets Iran's energy infrastructure, it could lead to a "much bigger Middle East war" and affect oil markets, he added.

Iran was the second-largest source of crude supply growth last year after the US, with production reaching about 3.4 million bpd and exports at about 1.5 million bpd.