Opec+ may boost output to cool overheating market
As outbreaks of the highly contagious Delta variant of coronavirus sparked new mobility restrictions around the world, oil prices continued to drop due to concern about slower fuel demand growth
The Opec+ group of oil-producing countries will meet on Thursday to decide on output boosting as oil prices dropped for a second day on Tuesday on worries about slower fuel demand growth.
The meeting is expected to agree on raising production in August in order to meet demand and dampen recent price rises.
As outbreaks of the highly contagious Delta variant of coronavirus sparked new mobility restrictions around the world, oil prices continued to drop due to concern about slower fuel demand growth.
Brent crude futures fell 16 cents, or 0.2 per cent, to $74.52 a barrel by 1100 GMT, after slumping 2.0 per cent on Monday.
US West Texas Intermediate (WTI) crude futures fell 33 cents, or 0.5 per cent, to $72.58 a barrel, extending a 1.5 per cent loss on Monday.
While improvement in demand drove Opec+ most recent rises in production, now price levels will also be a guiding force behind the club’s decisions, analysts said.
Opec+ expects that the market will remain in deficit this year if it keeps production steady, according to data that technical experts reviewed on Tuesday ahead of the coalition’s main meeting later in the week. The group may boost daily output by 500,000 to 1.0 million barrels a day, RBC Capital Markets said in a note.
“In order to keep prices at current levels where oil prices do not inhibit the economic recovery, the world requires more supply,” said Kevin Solomon, an analyst at brokerage StoneX Group Inc. “From a global perspective, there are seemingly growing concerns over the increase in the Covid-19 delta variant.”
After demand dropped when the pandemic broke out last year and crude prices briefly turned negative, the group led by Saudi Arabia and Russia imposed sharp production cuts in order to raise prices.
The 13 members of Opec and their 10 allies in the Opec+ grouping were rewarded by seeing prices for the two contracts of reference, Brent and WTI, recover to around $75 per barrel, levels not seen since October 2018.
The strategy has worked almost too well and the group is currently following a policy of cautiously turning the taps back on.
Russia is expected to favour increasing output, as it has done at several recent Opec+ meetings.
Moscow “may be more inclined to support a production increase in order to ensure a higher market share while limiting the risk of rising non-OPEC production,” according to Ole Hansen from Saxobank.
Opec’s demand forecasts show that in the fourth quarter global oil supply will fall short of demand by 2.2 million barrels per day, giving the producers some room to agree to add output.
In its last report in mid-June, the International Energy Agency (IEA) forecast that global demand would outstrip pre-pandemic levels by the end of 2022.
Analysts expect Opec+ to step up supply in August as the market has tightened on strong growth in fuel demand in the US and China, the world’s two biggest oil consumers.
Warren Patterson of ING bank said pressure would likely not only come from within the group, but there will also be growing calls from key consumers to cool the market down, as countries come out of the other side of Covid-19 lockdowns.
“India is a notable example. The world’s third-largest consumer of crude has been hit by a second coronavirus wave and has urged Opec+ “to phase out crude output cuts to temper rising inflationary pressures”, noted Stephen Brennock from PVM.
“If prices remain this high, this will eat into consumers’ disposable incomes and potentially choke economic growth, which, over time, will weigh on crude prices,” said Fawad Razaqzada of Thinkmarkets.
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