Oil headed for a sixth weekly advance after a keenly anticipated OPEC+ meeting delivered only a modest increase in output that failed to assuage concerns over a widening supply deficit.
The producers cartel agreed to a hike that amounts to just 0.4% of global demand over July and August. There had been speculation the Saudis were preparing to pump significantly more as part of a reset of relations with the US, and there were even suggestions that Russia might be exempted from the alliance’s monthly supply agreements.
That didn’t happen, with West Texas Intermediate closing up 1.4% after the decision and trading near $116 a barrel on Friday. A six-month long rally in the US benchmark — the longest such run in more than a decade — now looks set to continue. A report showing American crude stockpiles falling more than twice as much as expected last week at the start of the summer driving season highlighted the growing supply deficit.
OPEC+ agreed to production hikes of 648,000 barrels a day for July and August, about 50% larger than the increases seen in recent months. That means the group will be adding roughly 400,000 barrels a day of crude across those two months on top of the modest increases already agreed.
“It’s not enough,” Nadia Martin Wiggen, chief oil analyst at Pareto Securities AS in Oslo, said. “But It does show that OPEC is willing to increase production now trying to prevent $150 a barrel or $180 as a scenario.”
Consumers, including the US, had been pressuring Saudi Arabia for months to intervene to stop rising prices. Still, doubts persist that the group will fully deliver on the pledged increases, given that many members have struggled to raise output. OPEC+ will only add about 250,000 barrels a day in July and August due to those struggles, Martin Wiggen said.
The decision by OPEC+ could, in practice, mean 132,000 barrels a day each month of actual additional output from Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq, Citigroup Inc. said in a note. Prices have been marching higher in the past week as markets assessed the EU move, Chinese lockdowns were lifted and the US summer driving season got underway, it said.
The European Union also approved on Thursday a partial ban on Russian oil imports, potentially leading to a tighter market in coming months.
Oil slipped in Friday trading, trimming some of Thursday’s gains, after one measure of economic confidence in Europe dropped, with S&P Global’s composite purchasing managers’ index for Germany, France and Italy declining.
“Demand concerns following weaker than expected European PMIs are weighing on oil prices,” said Giovanni Staunovo, a commodity analyst at UBS Group AG.
Oil has been driven higher this year on rebounding demand as countries threw off virus restrictions, while Russia’s invasion of Ukraine has reduced supply from one of the world’s three-biggest producers. A potential resurgence in consumption in China, the world’s biggest crude importer, is now threatening to add even more upward pressure to prices.
The ramp up in OPEC+ supply wouldn’t be enough to balance a market that’s shifting into deficit due to the demand recovery in China, Goldman Sachs Group Inc. said in a note. The bank said its expectations for output from the alliance are skewed to the downside, given the European ban on Russian imports and a lack of progress on negotiations with Iran. It reiterated its forecast for Brent to average $125 a barrel in the second half.
The OPEC+ announcement also didn’t have much impact on oil’s market structure. Brent’s prompt timespread was $2.60 a barrel in backwardation — a bullish pattern where near term prices are higher than those further out — compared with $2.73 at the close on Wednesday.
US crude stockpiles fell around 5.1 million barrels last week, more than the median estimate for a decline of 2.1 million barrels, according to an Energy Information Administration report Thursday. New York-area gasoline stockpiles dropped to the lowest level since 2017.