OPEC agrees very limited increase

OPEC+ agreed to increase production by 100k b/d in September, a negligible change in output levels and unlikely to make a material impact on oil market balances. The producers’ alliance noted that oil markets had “severely limited availability of excess capacity” as “chronic underinvestment” had reduced the ability of the oil industry to respond to supply shortfalls or marginal demand growth. OPEC+ also seemed to validate a continuation of coordinated production policy in setting another meeting date at the start of September.

At an individual country level the 100k b/d increase is marginal. Saudi Arabia’s production target is just 26k b/d higher in September at 11.03m b/d. The increase in Saudi Arabia’s output over the month will be 780k bbl; that compares with the capacity of a VLCC tanker of between 1.5m – 2m bbl so Saudi will barely be adding one additional shipment to markets in September. For the UAE, oil output will increase by just 7k b/d to 3.19m b/d, a level that should be easily achievable given the country’s investment into upstream capacity.

Oil prices initially moved higher in response to the limited production increase but then snapped and broke lower with both Brent and WTI futures falling by around 4% on the day. The OPEC+ decision failed to change the narrative around oil markets at the moment: downside risks abound thanks to fears of a recession sparked by high inflation and tightening monetary policy and now compounded by an escalation of geopolitical tension between the US and China. For oil to garner upside from here markets will need to focus on the still constrained oil supply picture which will be amplified should the global economy skirt the edges of a recession but manage to avoid a contraction.

The small increase planned for September will help to keep the integrity of OPEC+ in place as Russia also received a higher production allocation, even if sanctions and limited ability to export its crude many mean further production shut-ins. The target looks largely a nominal level to us and could easily be achieved almost as an afterthought by some of the larger OPEC+ producers that have freedom of action on output levels. The higher output also could serve, at least on paper, to meet expectations from the US for higher oil output. High gasoline costs have helped to push inflation higher globally, and particularly in the US, though they are now starting to turn lower. Increasing the pace of oil production probably formed a big part of US President Joe Biden’s discussions with Saudi officials when he visited the kingdom in July. But we doubt an extra 100k b/d of OPEC+ oil will change the inflation dynamics in the US in a meaningful way.