OPEC+ agreed to lift September production quotas even as the Iran conflict keeps pressure on shipping routes and leaves traders focused on how much crude can actually move.
It is easy to dismiss OPEC+'s decision to raise crude oil production quotas for September as little more than a gesture while the Iran conflict continues to disrupt shipping. But the move still highlights how the producer group is trying to manage supply even as key export routes remain under pressure.
As long as the Strait of Hormuz remains largely closed and the threat to the nearby Bab el-Mandeb waterway is unresolved, there is little chance the group will be able to ship all that it has agreed to produce. The seven members of OPEC+ that are undertaking voluntary output cuts agreed on Sunday to increase production by 188,000 barrels per day for September.
The increase completes the phased rollback of a 1.65 million bpd supply cut first agreed in 2023, when the group still included the United Arab Emirates. The UAE left the Organization of the Petroleum Exporting Countries in May.
For now, the exact quota levels matter less than actual production. A Reuters survey showed the eight OPEC members with quotas pumped 20.276 million bpd in June, which was 6.246 million bpd below the agreed target.
Russia, the main non-OPEC member of the wider OPEC+ group, produced 8.928 million bpd in June, according to OPEC data, which was nearly 1 million bpd below its agreed quota.
OPEC+'s move to wind back voluntary production cuts carries little weight in the current market, but it does underline the challenge facing both oil exporters and importers. There are three main scenarios facing the crude oil market, and there is still a high degree of uncertainty over which is most likely.
The first is a peace deal between Iran and the United States that allows sustained and unfettered passage through the Strait of Hormuz and the Bab el-Mandeb.
The second is a conflict that continues in fits and starts, with periods of escalation followed by hopes of a ceasefire and a deal, before those hopes fade and missile and drone strikes resume.
The third is a further escalation in which U.S. President Donald Trump orders strikes against civilian and energy infrastructure and Iran retaliates against Gulf states that host U.S. bases, including Saudi Arabia, Kuwait and Iraq.
The crude oil futures market appears to be largely priced for the first option. Benchmark Brent contracts dropped 6.8% in early Asian trade on Monday to $83.98 a barrel.
That was about 34% below the conflict high of $126.41 a barrel reached on April 30, and it was only 16% higher than the $72.48 close on February 27, the day before the U.S. and Israel launched strikes against Iran.
If the first option is delivered, crude oil is likely to fall rapidly from current levels. OPEC+ members would probably be able to ramp up production relatively quickly and add more barrels to the market while other producers also try to maximize exports.
A comprehensive peace deal would also likely allow Iran to openly sell its crude, leaving Russian oil as the main supply still subject to Western sanctions.
If the second option prevails in the coming months, the OPEC+ quota decision becomes largely irrelevant. The focus would shift to how much oil can pass through the Strait of Hormuz and how effective Saudi exports via the Red Sea and the United Arab Emirates from the Gulf of Oman are in offsetting lost Hormuz volumes.
In that case, crude oil is likely to remain volatile and move on headlines tied to Trump's social media posts.
The third case is the one markets hope never happens, because it would imply long-term damage to energy infrastructure in the Middle East and global economic pain as the world adjusts to losing as much as 20% of its crude and liquefied natural gas supplies.
OPEC+ agreed to increase output by 188,000 barrels per day for September as it continued the phased rollback of earlier voluntary supply cuts.
The group agreed to add 188,000 barrels per day in September.
The article says the Strait of Hormuz remains largely closed, which limits how much oil OPEC+ members may actually be able to ship.
Reuters survey data showed the eight OPEC members with quotas pumped 20.276 million bpd in June, 6.246 million bpd below target.
Brent contracts fell 6.8% in early Asian trade on Monday to $83.98 a barrel.
Courtesy: www.reuters.com
