#OPINIONLEADER# #OilPriceFall#

 JUL 1, 2021

Oil market looking strong.

Crude oil prices rose to the highest level of $68.50 per barrel in more than two years as the OPEC+ agreed during their meeting in early June to ease oil production cuts by 2.1 million barrels-per-day (bpd). The upward pressure of oil prices was mainly driven by optimism in the oil market coming from key personnel of the industry. Saudi Energy Minister Prince Abdulaziz bin Salman highlighted during the meeting that oil demand has “shown clear signs of improvement” ever since the decision made in April to ease production cuts. In an interview after the OPEC+ meeting, International Energy Agency executive director Fatih Birol said that he expects “strong recovery of oil demand in the US, China, Europe and elsewhere”. Birol also warned that if the OPEC+ were to stick to their current production quota, the gap between the supply and demand of oil may widen, implying that oil prices may continue to push higher as supply fails to meet the increasing demand.

Will the OPEC+ meeting conclude with further easing of production cuts?

The OPEC+ will be meeting this Thursday for a discussion on oil production quota for August. According to the latest OPEC forecast of demand for crude oil, maintaining oil output at the current levels will lead to a supply deficit of 1.5 million bpd in August. Thus, it is likely that the group will be looking to increase the level of oil production for August.

With the recovering demand of oil, it is in the best interest of the OPEC+ members to open their oil taps and hike production. Also, the recent rise in oil prices has led to a strong spike in inflation around the world. It will not be surprising that the OPEC+ is being pressured by many countries to increase oil supply to meet the recovering demand so as to ease the upward price pressure.

During a recent conference, Prince Abdulaziz bin Salman said that the OPEC+ “has a role in taming and containing inflation” and ensuring that the oil market does not get out of hand. However, he also cautioned that it is unclear whether the recent rise in oil prices was due to “real supply and demand” or ”expectations and trajectories that are excessively optimistic”. Nonetheless, the Prince acknowledged that global oil inventories have declined and is optimistic about the demand of oil during the second half of 2021 and into 2022.

What about production quota beyond August?

We are sure that the OPEC+ will provide a quota for August during this Thursday’s meeting, most likely an increase in production. However, it is unlikely that the group will be announcing a production quota for the later months.

Despite its recent recovery, the demand of oil has received a new threat from the Delta variant of the COVID virus. It was recently reported that the Delta variant has spread to Europe. The UK has recently announced a delay in the easing of restrictions. There were also reports of infections surge in Southeast Asian countries like Indonesia, Malaysia and Thailand, leading to the resumption and extension of lockdown measures. Also, parts of Australia have recently went back into lockdown in an attempt to contain an outbreak. With the return of lockdown measures, the OPEC+ will face difficulty in forecasting the quota of oil into the near future as it may be impacted negatively. This means the group may stick to the month-to-month assessment of oil quota.

Another reason that will motivate the OPEC+ to not assess production quota beyond August is the ongoing Iranian nuclear talks. Iran is currently producing around 2.4 million bpd of oil while prior to the sanction, the country was producing around 3.8 million bpd. If the sanctions on Iran were to be lifted as a result of the revival of the 2015 nuclear deal, we can expect to see an increase in oil production from the country. The increase in oil supply may lead to some consequences on what the OPEC+ has decided for its quota in the near future. Once again, the group may prefer to keep the flexibility of adjusting its quota on a monthly basis.