Why does today's OPEC+ decision have little importance for oil?

OPEC+ will decide on the fate of the "output cut" agreement during its meeting this week (August 3-4, 2022). Current output levels (for August) are in line with reference values therefore it is rich to say that the agreement is limiting supply.

Moreover, it is said that OPEC+ is already struggling to reach production quotas and daily production at world's largest producers may be around 4 million barrels short of target. 

OPEC+ seems to be concerned about possibility of the global economic slowdown and is reluctant to boost production. In fact, only a few OPEC+ countries still have spare production capacity. Among those one can find Saudi Arabia, United Arab Emirates or Iraq. Even Russia is very limited in terms of increasing production and, above all, exports.

In theory, agreement may remain in place with a speculation that a 100k output increase will be agreed for September this week. Such an increase would be largely symbolic and would not change much. Saudi Arabia and United Arab Emirates are likely to keep increasing production but at moderate pace and without major announcements. However, "likely" is a key word here. Media reported that United States reached an agreement with Saudi Arabia and UAE on arms sales. This could lead to an announcement that production will increase significantly or that even a whole "output cut" agreement may be scrapped. Such a scenario would surely be accompanied with a bigger oil price drop.

However, it is not a base case scenario. Oil market remains tight and is likely to remain so. The latest data from JODI and IEF showed that oil and fuel demand is close to pre-pandemic levels. Additional supply is lacking, however, and it may keep prices near or above $100 per barrel.

What if the global economy falls into a recession? In such a scenario, a demand drop of 2-5% is possible. Such a drop would balance the market with prices dropping towards the $60-70 range. Without a recession and new production investments, a big drop in oil prices is unlikely.

Bloomberg shows that OPEC+ is way below its production goal. This is why this week's decision is of little importance. Source: Bloomberg

Oil prices are recovering today, mostly because of an expected decision to increase output by merely 100k barrels per day. On the other hand, oil remains in a downtrend that was sparked by fears over global economic slowdown. Source: xStation5