OPEC and partners agree on output hikes

OPEC+ has agreed to accelerate its targeted production increases in both July and August to 648k b/d per month, up from 432k b/d previously. In its statement following the early June meeting, OPEC+ acknowledged the upside risks to demand stemming from “recent reopening from lockdowns in major economic centers,” an oblique reference to China easing back somewhat on its Covid-19 restrictions. However, there was no mention of the EU or other bilateral sanctions that have been placed on Russia’s oil and refined product exports.

The upward adjustment in production targets is a reshaping of an existing oil market strategy for OPEC+, rather than a completely new approach to accommodate a clearly tight oil market. Setting higher monthly target levels may be as much an attempt to try and talk or coerce markets slightly lower as it is to actually supply them with additional volumes. OPEC+ has so far been struggling to hit the total monthly production increase targets and some of the new target levels appear highly ambitious. Russia remains part of the producers’ alliance and has been given a target level of 10.833m b/d to hit in July even as it will lose access to a major export destination. Within the core of OPEC, Nigeria’s July target of 1.799m b/d is almost 600k b/d higher than its current output levels. Many producers within OPEC+ are running up against capacity constraints so a higher monthly target level will be a notional, rather than achievable target.

OPEC+ has also extended its compensation period until the end of 2022, extending the deal somewhat to allow producers to exceed target levels for missing quotas. But given that many producers are limited in how much more they can actually produce, the compensation period isn’t likely to result in a material increase in overall production.

For those countries that do have the capacity to increase—Saudi Arabia and the UAE chief among them—the revision to the target levels allows a little more oil output while prices are still high so a net positive in terms of growth and fiscal and external balances. But there doesn’t appear to be much momentum toward making up for the shortfalls of other producers. Nor do we expect that Saudi Arabia would be willing to eat into its spare capacity too far given that demand may surprise on the upside. Meanwhile, supply growth outside of OPEC+ is limited: US oil production has essentially flat-lined this year.

While the adjustments to July and August production targets may show that there is more flexibility in OPEC+ we don’t expect that the higher targets will have a material impact on loosening oil market balances. Hence we maintain our projection for Brent futures at an average of USD 120/b in Q3 before a potential easing by the end of the year.