Opec ministers meet ahead of likely production unwind

Opec ministers will meet today ahead of a broader Opec+ assembly tomorrow that could bring back the last of the roughly 10mn b/d of oil output that the coalition removed in May 2020 in response to the Covid-19 pandemic.

The group must address mounting inflation, high prices at the pump and burgeoning demand that has reduced this year's supply surplus to 1mn b/d, according to a report of the Opec+ Joint Technical Committee (JTC).

Some Opec+ delegates expect tomorrow that ministers will confirm the 648,000 b/d August quota increase they provisionally sketched out at the start of the month. This will effectively bring forward by a month the hikes they had initially planned for July-September.

One Opec+ delegate suggested the group could explore redistributing the August rise, as several producers have struggled to meet their quotas because of capacity constraints, chronic underfunding, infrastructural collapse and sabotage. Delegates have previously said such a proposal would get a cool reception, although one noted it could gain more traction as more producers exhaust their capacities.

The production shortfall has progressively deepened, with Argus seeing Opec+ output 2.79mn b/d below May quotas. Opec's core Mideast Gulf producers say they can deliver further output. Kuwait can "go higher than [its July quota] and we have the plans in place right now to ensure that we can continue to match whatever increases are going to be required", state-owned KPC chief executive Sheikh Nawaf Saud al-Sabah said. Iraq's exports will increase to 3.8mn b/d this month and 3.85mn b/d in July, oil minister Ihsan Ismael pledged, up sharply from the Argus-tracked 3.63mn b/d in May. UAE oil minister Suhail al Mazrouei said this week that Abu Dhabi is producing close to its 3.168mn b/d Opec+ deal baseline.

Not all production increases will necessarily boost exports. The higher 648,000 b/d hikes come at a time when major producers including Saudi Arabia have seasonally higher domestic consumption for power generation needed for air conditioning.

Opec+ has been under pressure to increase output and lower the strain on consumer households, notably from US president Joe Biden, who is due to visit Saudi Arabia on 15-16 July. His trip will not necessarily result in further Saudi production - Opec+ sources have stressed Riyadh's focus on not depleting emergency spare global capacity to a point where prices soar.

Opec+ ministers are also watching how Russian flows will stabilise, following western restrictions in response to Moscow's invasion of Ukraine. The G7 group of major world economies is working on a proposal to impose a price cap on Russian oil exports to third countries, rather than additional restrictions to strip out supplies from the market.

Demand could rise further. The world's largest oil importer, China, is experiencing a fragile recovery after strict Covid-19 lockdowns during the second quarter. Several government policies to protect households by cutting fuel taxes could also sustain buying appetite.

By Ruxandra Iordache