Opec+ has agreed to increase output by 648,000 barrels per day of oil in July and August, higher than its previous production target, as high crude prices continue to pose global inflationary concerns and risk of demand destruction.
Oil prices remained steady on Thursday, despite the cartel’s move to unleash extra barrels in the market.
Western countries, including the United States, have been demanding a steeper hike in Opec+ oil production quotas and the decision is seen as a strategic one, as US President Joe Biden reportedly plans to visit Saudi Arabia in the near term.
The move by Opec+ could be seen as a sign of willingness by Saudi Arabia and other Opec Gulf allies to pump extra barrels, after intense pressure from the Western nations to boost output levels.
Spot Brent crude traded at almost $116.9 per barrel on Thursday evening, registering a marginal price increase following the decision by the Opec+ group, which includes Russia, to stick to ramping up its output levels.
Opec said in a statement that it has advanced “the planned overall production adjustment for the month of September and redistribute equally the 432,000 barrels a day production increase over the months of July and August 2022.”
The cartel also reiterated the critical importance of adhering to full conformity and to the compensation mechanism for the members.
Russian production concerns
Concerns over Russian exports continue to drag oil prices higher, as uncertainty remains over its long-term production levels, despite having a higher quota.
European Union leaders recently agreed to embargo most Russian crude imports into the 27-member bloc by the end of the year, as sanctions are ramped up following Moscow’s invasion of Ukraine.
The embargo covers Russian oil delivered on tankers but allows a temporary exemption for imports delivered by pipeline, a move that was crucial to bring landlocked Hungary on board, as the decision required a consensus.
Increased sanctions from Western countries are likely to reduce production from Russia, the world's second-largest oil exporter, by as much as 3 million bpd, according to industry estimates.
Saudi Arabia and Russia’s oil production quota remained at 10.8 million bpd each, according to the most recent Opec+ targets, but Russia is expected to export relatively lower in the coming months, owing to the growing Western sanctions.
Increased upstream activity
Sustained higher oil prices are expected to lead to increased exploration and development efforts in the upstream sector, with more investment decisions likely to take place later this year for complex offshore and deep-water projects.
Offshore rig dayrates have started tightening and leading international oil companies have ramped up exploration efforts, after record earnings due to higher oil prices.
Saudi Aramco recently inked agreements for more than two dozen jack-up rigs and is also expected to soon hit the market for 10 additional offshore units.
European and Middle East national oil companies like Aramco have reported record profits in the first quarter on the back of high oil prices.