OPEC+ approves further oil production increase

OPEC+ said in a statement on Sunday it has agreed to further raise production targets from August, boosting global supplies as oil prices fall amid a gradual resumption of oil exports through the Strait of Hormuz.

Oil producers agreed in an online meeting to increase oil production by 188,000 barrels per day starting in August, on top of similar production increases in June and July.

The seven core members of OPEC+, a group of allied producer countries including OPEC and Russia, raised production quotas by about 800,000 barrels per day from April to July.

However, the increase remains largely on paper as the US and Israel’s war against Iran has closed the Strait of Hormuz to tanker traffic from some of the most important OPEC+ members, including Saudi Arabia, Kuwait and Iraq.

OPEC+ production fell to 33.13 million barrels per day in May from 42.77 million barrels per day in February, according to OPEC data. It began to recover in June thanks to U.S. efforts to help the UAE and other OPEC+ countries expand their oil exports, but remains below pre-war levels.

Despite continued supply disruptions, oil prices have returned to pre-war levels, weighed down by falling imports from China, rising exports from producing countries outside the Middle East, and record global strategic inventory releases coordinated by the International Energy Agency.

“The Group of Seven continued to lift production cuts, as most expected,” UBS analyst Giovanni Staunovo said. “The immediate focus will continue to be on how many tankers can pass through the Strait of Hormuz and how quickly demand and China’s crude oil imports recover.”

A memorandum of understanding between Washington and Tehran to end the war also helped convince traders that supplies would eventually return to normal levels.

Brent crude oil prices traded around $72 a barrel on Friday, down from recent highs of more than $120 a barrel and back to the levels they traded just before the U.S. and Israel attacked Iran on Feb. 28.

In addition to agreeing on production targets, OPEC+ faces other challenges with the United Arab Emirates leaving the group and Iraq signaling a desire to expand production quotas.

OPEC+ has 21 members, including Iran, but in recent years only seven (and until it left, the UAE) have been involved in monthly production management.

These seven producers (Saudi Arabia, Russia, Iraq, Kuwait, Algeria, Kazakhstan and Oman) are ramping up production as part of an agreed phase-in of 1.65 million barrels per day of supply cuts in 2023, although the group still included the UAE.

The UAE left the alliance in late April to be freed from production restrictions imposed by the group and to more closely match production.

Taking into account the UAE’s May 1 withdrawal, the seven core member states will be able to return about 379,000 barrels per day of their original production cuts to the market after August, according to Reuters calculations.

With the decision to raise interest rates in August, the 2023 rate cut will be completely eliminated if the Bank implements another rate hike of roughly the same size in September at its next meeting on August 2.