OPEC and allies commit to higher volumes in August

OPEC+ agreed to increase production in August by 648k b/d, effectively endorsing a plan announced earlier in June. There was no commentary in the OPEC+ statement about whether the production adjustment, the group’s name for its coordinated production policies, would extend beyond September as, in principle, the increase for August would unwind all of the cuts made by OPEC+ during the Covid-19 pandemic.

Production targets for August at a national level have Saudi Arabia at 11m b/d, a level it has only reached briefly in the past and most recently in April 2020 when it was locked in a price war with its now partner Russia. For the UAE, the target level of 3.179m b/d should be achievable given the country has made substantial investment into its upstream capacity, hitting 4m b/d of capacity back in 2020. Russia’s target level of 11m b/d looks like a particular challenge to achieve given the country’s crude exports are set to be under sanction from the EU and are already being disrupted by firms choosing to self-sanction trade in Russian oil.

OPEC already missing targets: output compared with target levels

Source: IEA, OPEC, Emirates NBD Research. Note 1 = full compliance with monthly production target.

The absence of any discussion of what happens once all the pandemic-related cuts will be a concern for an oil market that is screaming out for additional barrels. Spot prices have come off since the start of June as financial markets generally price in an imminent global recession but time spreads, both in the futures and physical market, remain exceptionally tight. Market signals for the health of demand in H2 2022 and beyond are mixed. Early indications that the Zero-Covid induced slump in Chinese economic activity has bottomed could set up for a bounce in activity. At the same time growth in the US is evidently slowing: personal spending has come in lower than expected for May and a tend of slower growth looks to be firming up.

Even if there are broad downside risks to demand, we don’t think that they will outweigh the supportive factors for oil prices. OPEC+ is unlikely to be able to hit its targeted increase on aggregate over the next two months given most countries have been failing to hit their lower prior levels and how long Saudi Arabia can maintain production of 11m b/d or higher is an open question. Combined with the draining of global inventories—both commercial and strategic—we maintain our expectation for oil prices to be high over the coming quarters, targeting Brent at USD 120/b on average in Q3 and USD 115/b in Q4.