Oil prices decline on Opec+'s September output hike decision

Oil prices dropped on Monday after oil producers’ alliance Opec agreed to another large output hike in September.

Brent, the benchmark for two thirds of the world's oil, fell 2.2 per cent to $68.12 a barrel by 5.09pm UAE time on Monday, and West Texas Intermediate, the gauge that tracks US crude, declined 2.5 per cent to $65.6 a barrel.

The Organisation of the Petroleum Exporting Countries and their allies, known as Opec, agreed on Sunday to raise oil production by 547,000 barrels per day for September, the latest in a series of accelerated output hikes to regain market share.

The move marks a full and early reversal of Opec's largest tranche of output cuts, amounting to about 2.5 million bpd, or about 2.4 per cent of world demand.

“The meeting lasted just 14 minutes, suggesting there was no pushback and broad support for the decision,” said Giovanni Staunovo, a strategist at the Swiss bank UBS.

“With Sunday's decision, the group fully unwound one layer of the 2.2 million barrels per day [mbpd] of voluntary crude production cuts. The production quota increase between March and September is closer to 2.5mbpd, as it includes a capacity-related quota adjustment for the UAE of 0.3mbpd.”

So far, the oil market has been able to absorb the additional barrels coming from Opec very well, with Brent crude moving mostly sideways in a $60 to $70 per barrel range in recent months, Mr Staunovo explained.

With some countries in the group producing above the quota, as well as those that previously overproduced facing compensation cuts and some members probably maxed out in terms of capacity, the actual production increases are likely to be lower this and next month as well, he added.

“All eyes now shift to US President Donald Trump's decision on Russia later this week and whether he targets buyers of Russian oil with secondary sanctions or tariffs,” Mr Staunovo said.

Recent geopolitical tensions have added to oil market volatility this year. A 12-day conflict between Israel and Iran earlier this year drove oil prices up by more than 13 per cent before they retreated below prewar levels.

Vijay Valecha, chief investment officer of Dubai-based Century Financial, said the escalating geopolitical tensions surrounding Russian oil could significantly tighten global supply.

US President Donald Trump's aggressive stance, threatening 100 per cent secondary sanctions on Russian crude buyers, risks removing up to 2.75 million bpd from the seaborne market, potentially forcing major importers like India and China to seek alternative, more expensive sources, he added.

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“This prospect of substantial supply disruption, combined with renewed expectations of Federal Reserve rate cuts following weaker US jobs data, could stimulate demand as a weaker dollar makes oil more affordable,” according to Mr Valecha.

“Should these sanctions materialise and global growth avoid a significant downturn, the tightening supply-demand balance would create a powerful tailwind for oil prices.”