Opec+ sticks to June output plan as oil prices continue to rise
▶ Group acknowledges effects of geopolitics and Covid-19 but says fundamentals point to a balanced market
The Opec+ group of oil producers has said it will add 432,000 barrels per day of crude to the market next month, continuing with its output plan despite rising prices.
The group said the “continuing oil market fundamentals and the consensus on the outlook pointed to a balanced market” while acknowledging the “continuing effects of geopolitical factors and issues related to the ongoing pandemic”.
Global benchmark Brent was 0.4 per cent lower at $109.73 a barrel by 7.54pm UAE time. US West Texas Intermediate crude dipped by 0.7 per cent to $107.05.
The alliance, led by Saudi Arabia and Russia, will hold its next meeting on June 2 to review market dynamics.
Oil prices have been extremely volatile this year, affected by the conflict in Ukraine and concerns about demand in China, as well as tighter US crude inventories.
This week, the EU proposed plans to ban Russian oil over the next six months and refined fuels by the end of the year, but the proposal has not yet been officially approved.
Giovanni Staunovo, a strategist at UBS, said the decision by Opec+ to continue its plan could be attributed to several factors, including a 500,000 bpd increase in Russian crude exports last month compared with March.
Rising commodity and food prices around the world have led to record inflation. The Bank of England raised interest rates on Thursday from 0.75 per cent to 1 per cent – a 13-year high – as inflation in the UK sits at the highest level in 30 years.
Following the news, Britain’s pound fell by more than a cent against the US dollar to its lowest level since mid-2020, below $1.24. Global equity markets also slumped on Thursday, wiping out gains from Wednesday amid darker economic forecasts for the year ahead.
The US Federal Reserve had on Wednesday raised its key rate by half a percentage point, its most aggressive decision in 22 years, to curb inflation.
The central banks of the UAE, Saudi Arabia, Bahrain, Kuwait and Qatar have also increased their benchmark interest rates.
Opec+ agreed to stick to its oil output plan and will continue to add 432,000 barrels per day to the market in June, even as prices continue to remain volatile after the EU announced a phased strategy to ban crude imports from Russia by the end of this year.
The 23-member super group of producers, led by Saudi Arabia and Russia, agreed to the modest production increase during an online meeting on Thursday. The group will hold its next meeting on June 2 to review market dynamics, it said.
Opec+ said the “continuing oil market fundamentals and the consensus on the outlook pointed to a balanced market”.
It acknowledged the continuing effects of “geopolitical factors and issues related to the ongoing pandemic”.
Brent, the global benchmark for two-thirds of the world’s oil, was 0.24 per cent higher at $109.88 a barrel at 8.31pm UAE time on Thursday.
West Texas Intermediate, the gauge that tracks US crude, was trading 0.48 per cent higher at $107.29 a barrel.
Oil prices have been extremely volatile this year, affected by the conflict in Ukraine, concerns about demand in China and tighter US crude stocks.
Earlier this week, the EU proposed plans to ban Russian oil over the next six months and refined fuels by the end of the year
as a result of Moscow’s war in Ukraine. However, the proposal has yet to be officially approved by the bloc’s parliament.
The EU aims to agree on the next round of sanctions by the end of the week or Monday.
“Increased market volatility is to be expected,” said Oslo consultancy Rystad Energy.
Oil prices have been hit by the Covid-19-related demand downside in China and the big Strategic Petroleum Reserve release by the US and the International Energy Agency in early April. However, higher prices could be around the corner, Rystad said.
“Energy prices remain under a decent positive pressure as the European nations now consider walking away from Russian
oil as the next step of the economic sanctions that they impose on Russia,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
“But the European decision is not Opec’s problem … On the other hand, the Opec countries haven’t been able to meet the daily quotas over the past couple of months, so it does not really make sense to have quotas in place if the producer countries fall repeatedly behind their target.”
For several months, the Opec+ alliance worked to bring back 5.8 million bpd in an effort to restore supply that was greatly reduced after the onset of the Covid-19 pandemic in 2020. The alliance
achieved a historic reduction of 9.7 million bpd between May 2020 and July of last year.
But its task is becoming harder as it needs to decide on the amount of barrels it should bring back to the market amid a softening global economy due to the Ukraine war and pandemic-related curbs in China that are derailing economic momentum in the world’s biggest oil importer.
The group increased its monthly quota to 432,000 bpd in May, according to its higher baseline levels for several producers in the alliance.
This is about 30,000 bpd more than what had been the monthly target since the third quarter of last year. However,
the coalition has struggled to reach the agreed levels, with Opec+ members producing 1.45 million bpd below their production targets for March.
After its meeting on Thursday, Opec+ reiterated the “critical importance of adhering to full conformity”.
Last month, Opec also lowered its demand and supply forecasts for 2020 as a result of market uncertainty.
Global demand will rise by 3.67 million bpd in this year, down 480,000 bpd from its previous forecast, the group said.
Total consumption is expected to surpass the 100 million bpd mark in the third quarter, as predicted previously by the oil group.
“In 2022, oil demand growth was revised to the downside … accounting for declines in global GDP [gross domestic product] on account of the geopolitical developments and the resurgence of the Omicron variant on global oil demand in China,” Opec said.
This year’s non-Opec supply is forecast to fall by 300,000 bpd to 2.7 million bpd due to a decline in supplies from Russia as a result of sanctions.
“It is vital we have stable energy markets, for both producers and consumers, as exhibited during the pandemic,” Opec secretary general Mohammad Barkindo said at the Joint Technical Committee meeting on Wednesday.
“In this regard, we urge global leaders to continue to support the type of multilateralism exhibited in the [Opec+ alliance], to ensure an unhindered, stable and secure flow of energy to the whole world.”
Looking ahead, the outlook for the oil market remains bullish, although prices may not touch the highs of close to $140 a barrel that were reported earlier this year, said Ms Ozkardeskaya.
“The war in Ukraine, the sanctions on Russian oil – combined [with] capacity restrictions, other disruptions like attacks and social unrest in oil-producer countries and the lack of investment – should continue increasing the gap between supply and demand and give investors enough reason to remain bullish in oil in the short to medium run,” she said.
“But it also looks like the oil rally will likely remain capped below the $120 to $130 area as above this price range, the slowing demand could also slow the rally. Therefore, levels we saw at the beginning of the Ukrainian war may be the peak levels.”