OPEC+ Boosts August Oil Output by 548,000 Barrels Per Day

OPEC+ alliance, comprising key members including Saudi Arabia and Russia, announced a further increase in oil output for August, setting the target at 548,000 barrels per day. This decision surpassed analysts' expectations, who had anticipated an output increase of 411,000 barrels per day, consistent with the targets set for May, June, and July.

The alliance cited a steady global economic outlook and healthy market fundamentals, evidenced by low oil inventories, as the rationale behind the decision to boost output. This move signals a strategic shift towards a market share strategy, as noted by Jorge Leon of Rystad Energy. The decision raises two critical questions: whether OPEC+ will target the next tier of 1.66 million barrels per day once the full 2.2 million barrels per day of voluntary cuts are unwound, and whether there is sufficient demand to absorb the increased supply.

Given that oil prices have been holding comfortably above $60 per barrel and considering the geopolitical backdrop, including the fragile ceasefire in the Middle East and broader risks in Ukraine and Libya, the market may be able to absorb the additional supply. Giovanni Staunovo of UBS highlighted that the overproduction by Kazakhstan and Iraq, which have exceeded their higher quotas, is a factor supporting the decision to unwind the cuts.

The recent 12-day conflict between Iran and Israel, which briefly pushed prices above $80 a barrel due to concerns over the potential closure of the strategic Strait of Hormuz, adds to the geopolitical risks. The Strait of Hormuz is a critical chokepoint for about one-fifth of the world’s oil supply. The OPEC+ group, which includes the 12-nation Organization of the Petroleum Exporting Countries and its allies, began output cuts in 2022 to support prices. However, a policy shift led by Saudi Arabia resulted in a significant increase in production from May, causing oil prices to plummet.

Oil prices have since stabilized around $65-$70 per barrel. By approving another output hike, Saudi Arabia may be exerting pressure on members who have not adhered to agreed quotas, potentially impacting expected oil profits due to lower prices. An estimate showed that the alliance’s production increased by only 200,000 barrels per day in May, despite doubling the quotas, indicating a gap between targeted and actual production increases.