Major oil-producing countries are expected to agree on Thursday to boost output in August to meet growing demand and limit recent price rises.
The cost of crude oil has surged back to levels last seen in October 2018, which would normally support arguments in favour of boosting production. India, the world’s third-largest consumer of crude, has urged the OPEC+ group of top oil producers to phase out its current regime of cuts and allow prices to fall as inflationary pressure threatens to hobble economic recovery.
– A modest rise? –
OPEC members led by Saudi Arabia began to confer Thursday via a teleconference. Later Thursday, from 1500 GMT, they are to be joined by 10 allied oil producing countries led by Russia. Angolan Oil Minister Diamantino Azevedo, who currently holds the OPEC presidency, said that although oil demand was expected to rebound strongly in the second half of the year, it was “no time to lower our guard”. “The coronavirus continues to take a painful toll, with thousands of lives still being lost every day,” he said. Azevedo added that the new Delta variant and recent surges in case numbers in numerous countries were “a grim reminder of the uncertainties that still loom over us”.
Since 2016 the alliance has voluntarily reduced oil output to maintain prices, in particular since the coronavirus epidemic struck last year, demolishing global demand for oil. Since April 2020, millions of barrels of crude oil have intentionally been left untapped, a prudent strategy that “has thus far been spot on”, said Stephen Brennock, an analyst at PVM oil brokerage. “It has managed to restore the oil balance without over-tightening the market,” he added. After plummeting in the early stages of the Covid-19 pandemic, oil prices have rebounded to around $75 a barrel for the two leading oil contracts, North Sea Brent and West Texas Intermediate (WTI). Oil traders therefore expect OPEC+ to maintain its overall strategy and many look for a modest increase in output of around 500,000 barrels per day starting in August. “This would be a compromise solution that both the OPEC Gulf States, which tend to express more caution, and their partners such as Kazakhstan and Russia, which tend to push for bigger production hikes, could find acceptable,” Brennock said. OPEC+ members are already benefiting from the increase in prices, but if they rise too much, it will encourage competitors to tap sources that are not subject to the alliance’s output quotas.
– Delta risk –
Even though Russia wants to pump more oil, surges in cases of the Delta variant of the coronavirus could put a damper on demand in many parts of the world, including Russia itself. On Thursday, the country posted a record number of Covid-19 related deaths for the third straight day. Since December the OPEC+ countries have met each month to calibrate their strategy as closely as possible to the latest developments. They are also tracking political developments concerning Iran, a key OPEC member. Tehran is under a US-led embargo that hampers its oil sector as talks try to salvage a 2015 nuclear deal that could see Iran eventually able to export substantially more than it does now. That would likely force other major oil producers to reduce their output levels or see crude prices drop.