The OPEC+ producer group said after its meeting last week that it would advance oil production increases to compensate for the loss of Russian production following Western sanctions following the invasion of Ukraine by Russia.
But while the action would appear to be an attempt to ensure supply meets demand, and therefore prevent prices from climbing even higher, OPEC+’s move was quickly followed by news that Saudi Arabia will increase its official sale prices for July for its customers in Asia and Europe.
OPEC+ said after its June 2 meeting that the group would increase production by 648,000 barrels per day (bpd) in July – or 0.7% of global demand – and by a similar amount in August, compared to an initial plan to add 432,000 bpd per month over three months through September.
OPEC+ brings together the Organization of the Petroleum Exporting Countries and other producers, including Russia, which has seen its output drop by about 1 million bpd since the Feb. 24 attack on Ukraine.
The oil market was unimpressed with OPEC+’s promise of higher production, with benchmark Brent crude futures gaining 1.8% on June 3 to close at $119.72 a barrel.
Brent is now about 24% higher than it was the day before Russia invaded Ukraine, and given the European Union’s decision to end about 90% of its imports from Russia, the pressure remains for further gains.
The problem for oil markets is that OPEC+’s credibility is under severe strain, given the group’s inability to produce as much crude as it claims.
The OPEC part of the group produced 24.72 million bpd in May, meaning their production was about 858,000 bpd below the target agreed by the wider OPEC+ collective.
Add to that falling production and exports from Russia, and it’s clear that actual supply is well below what OPEC+ has promised.
This failure to meet targets is drawing increasing attention to a market that is worried about whether Russia will be able to switch customers and maintain export volumes, or whether the global market will tighten. more as Russian volumes decline.
OPEC+’s decision to say it would increase production can be seen as an attempt to calm the market in the face of supply concerns, and therefore try to ensure prices do not rise to levels that would lead to a global economic slowdown and the consequent destruction of demand.
PRICE BOOST IN SAUDI
It is perhaps curious that Saudi Aramco, the kingdom’s state-controlled oil producer, has chosen to raise its official selling prices (OSPs) for refiners in its main destinations in Asia and Europe for cargoes loaded in July.
Aramco lifted OSP from its Asian benchmark Arab Light to a premium of $6.50 a barrel to regional benchmark Oman/Dubai, up $2.10 from 4.40 $ for June and above the $1 to $1.50 increase expected by Asian refiners surveyed ahead of the announcement. .
The OSP for Northwest European customers for Arab Light was raised to $4.30 a barrel against Brent for July, up from $2.20 for cargoes loaded in June.
An increase in PSOs for Asia was still on the agenda given the recent surge in refining margins, but also the increase in the premium for Brent compared to the Dubai equivalent.
A typical Singapore refinery processing Dubai crude enjoys a margin of around $25.19 a barrel, more than three times the 365-day moving average of $8.11.
This reflects strong demand, particularly for diesel, and the sharp decline in refined fuel exports from China this year, as well as from Russia, which has tightened product markets.
While it makes sense for Aramco to raise prices to capture some of the high refining margins, this is apparently at odds with OPEC+’s idea of ensuring markets are well supplied at a price that does not not harm the demand outlook.