OPEC+ Considers Output Hike Above 411,000 bpd for July, Extending Oil Price Weakness

OPEC+ is contemplating an increase in crude oil output for July exceeding 411,000 barrels per day (bpd), a move that would sustain the recent downward trajectory in oil markets. Over the past few months, eight core OPEC+ members – including Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Oman, Algeria, and the United Arab Emirates – have been incrementally reversing earlier voluntary production curbs. This larger-than-anticipated supply ramp-up is already exerting downward pressure on crude prices.

Impact on Oil Prices

• Even ahead of any formal OPEC+ announcement, oil prices have reacted to speculation of a further substantial production hike. July is anticipated to mark the third consecutive month of output increases approximately three times larger than initially projected. US West Texas Intermediate (WTI) futures slipped by circa 1.2% to $60.20 per barrel, while Brent crude futures fell nearly 1.6% to $62.35 per barrel.
• Market sentiment is cautious, with concerns that continued supply growth amidst current global demand uncertainties – including slowing growth in major economies – could precipitate further price declines. Numerous global investment banks are revising their forecasts downwards, signalling expectations of price weakness not only this year but extending into the next.
• Oil market analysts suggest that a production increase is already partially priced in; however, attention is also being drawn to indications of an appetite for an even more significant output boost than first mooted.

Context of the OPEC+ Decision

• The faster-than-scheduled production ramp-up by some OPEC+ members is viewed as an attempt to regain market share and compel nations previously oversupplying – such as Iraq and Kazakhstan – to curtail their output.
• Kazakhstan's decision to maintain its current production level has reportedly sparked discussions within the broader group about an even larger collective output increase.
• OPEC+ is attempting to navigate a delicate balance: striving to maintain price stability while simultaneously seeking to bolster revenues for member states' budgets amidst challenging economic conditions.
• It is pertinent to note, however, that current crude prices are markedly below the fiscal breakeven levels for several key producers. For Saudi Arabia, this breakeven price is estimated to be around $83 per barrel, approximately $20 higher than current levels. The market was closest to this price point near the beginning of this year, having surpassed it in mid-2014.

Brent crude is trading at its lowest level since May 8th. Source: xStation5