The prices of the black liquid are down at the start of the London session on Friday as the market is reacting to the decision of the Organization of Petroleum Exporting Countries and its allies, an oil cartel known as the OPEC+, to increase oil production in the market.
However, there are still pushbacks from bulls as investors questioned whether the incremental output would make up for lost Russian supply and meet China’s growing demand amid easing COVID restrictions.
The global benchmark, the Brent crude oil futures is down 0.79%, currently trading at $116.66 per barrel as of the time of this writing while the United States benchmark, the West Texas Intermediate (WTI) crude futures is down 0.92%, currently trading $115.80 a barrel.
What you should know
A decision was made on Thursday by the OPEC+ to boost output by 648,000 barrels per day (bpd) in July and August, instead of by 432,000 bpd as previously agreed.
The increases were divided proportionally across the member countries, but with Russia included in the pact and members such as Angola and Nigeria already failing to meet their targets, analysts said the supply increase was likely to be less than the announced volume.
ANZ Research analysts said in a note that, “The fact that Russia was left in the group suggests that production from the alliance will continue to struggle to meet even this modest increase in quota rises.”
They further added that Russian output has already dropped by 1 million bpd since its invasion of Ukraine, which Moscow calls a “special military operation”, and is likely to fall even further as the European Union’s ban on Russian oil kicks in.
On the pushback by bulls, SPI Asset Management Managing Partner Stephen Innes had this to say, “To put it another way, traders think the incremental increase is too small relative to the growing downside supply risks from the EU embargo amid an expected increased demand from China.”
With daily COVID-19 cases falling, China’s financial hub Shanghai and the capital, Beijing, have relaxed COVID-19 restrictions this week. The central Chinese government vowed broad support to stimulate the country’s economy, which is expected to target high fuel intensity sectors such as infrastructure and property construction.
This indicates that the bearish reaction we are seeing in the market today may be short-lived as more demand for oil on the back of China opening up its economy is coming into the market analysts warned, though, of downside risks to oil demand and prices, as Beijing has not changed its stance on COVID-19 rules. For example, analysts from National Australia Bank said in a note that, “China’s re-opening from COVID lockdowns is positive for demand for now but the country retains a zero-COVID policy so snap lockdowns can quickly erode this impact.”
Although Brent is on track to fall for the week, however, WTI is still on course for its sixth weekly gain as U.S. supply is seen as very tight, prompting talk of fuel export curbs or a windfall profits tax on oil and gas producers. Government data on Thursday showed U.S. crude stockpiles fell much more than expected in the week to May 27 and gasoline inventories fell, defying expectations for an increase.
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