- OPEC+ surprised markets by announcing a larger-than-expected August output hike of 548,000 bpd.
- Analysts say actual supply increases remain limited due to ongoing compensation cuts.
- Strong summer demand, especially from Asia, is expected to absorb the added barrels, but demand could falter this autumn. OPEC+ never fails to surprise speculators and market analysts. This weekend’s meeting to decide August production levels was expected to be a short routine video call to announce another output hike of 411,000 barrels per day (bpd). Short it was, but the size of the increase for August was bigger than expected— 548,000 bpd. The eight OPEC+ members that are unwinding the cuts are expected to make another supersized increase in September, with which the 2.2 million bpd cuts will all be back on the market, at least the headline figures suggest so. OPEC+ continues to rely on strong summer oil demand to absorb the additional barrels. The physical market appears to be tight in the near term, although the coming glut in the autumn and beyond is likely to push oil prices further down. Oil didn’t collapse following this weekend’s OPEC+ decision—a sign that there isn’t immediate fear of oversupply and that the market hasn’t shaken off entirely geopolitics-driven volatility.
Immediately after the OPEC+ meeting, Saudi Arabia raised the official selling price (OSP) for its crude destined for Asia and Europe in August, betting on robust summer demand to soak up the additional supply.
Current oil prices in the $60s per barrel are likely to encourage buying in Asia, as China continues to stockpile crude with high purchases at lower oil prices. The market is still tight in the near term, with the tightness reflected in the strength in the prompt Brent timespread, ING commodities strategists Warren Patterson and Ewa Manthey wrote in a note on Tuesday.“The expected supply surplus won’t materialise until later this year, when we expect more sustained downward price pressure,” they added. The middle distillate market is also tightening, more so than the crude market. Gasoil refining margins are rising, while speculators hold the largest net long position – the difference between bullish and bearish bets – in gasoil for a year, according to ING.
In the United States, middle distillate inventories sit at their lowest level in more than two decades for this time of the year, the bank’s strategists noted.
Saudi Aramco’s crude price hikes to all regions for August-loading cargoes also signal that physical markets remain tight, “suggesting the additional barrels can be absorbed—for now,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in a Monday note.
“In the short term, downside risks to crude appear contained,” Hansen said.