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The decision by OPEC+ to increase crude oil production quotas for a fifth straight month from August raises two questions.
Can they actually ship the increased output and if they can, who will buy it?
The seven core members of OPEC+, which groups together OPEC and allied producers such as Russia, agreed at a meeting on Sunday to lift quotas by 188,000 barrels per day from August, taking the total increase to almost 800,000 bpd since April.
The first question will be answered in the positive if the Strait of Hormuz can remain open and volumes through the narrow waterway can recover to levels close to before the United States and Israel attacked Iran on February 28.
As an aside, it’s worth noting that total crude export volumes from the Middle East should be the benchmark, rather than just flows through the strait.
This is because Saudi Arabia and the United Arab Emirates are continuing to use ports outside the Strait of Hormuz.
But even looking at total shipments from the Middle East, it’s clear that while volumes have lifted since the United States and Iran agreed to a 60-day ceasefire on June 17, they are still well below pre-war levels.
June exports were 9.62 million bpd, roughly half of the 18.4 million bpd average for the three months leading up to the Iran conflict, according to data compiled by commodity analysts Kpler.
July is likely to see a further improvement with Kpler tracking shipments of 9.99 million bpd, but this figure is likely to be revised higher as more cargoes are assessed.
But even so, the data show that Middle East exports are still constrained and increased shipments from other regions, such as the Americas and Africa, haven’t been enough to offset the losses from the Gulf region.
However, the oil industry has a proven track record of adapting rapidly and it would be a reasonable assumption that they are capable of boosting production and shipments from the Middle East, as long as the Strait of Hormuz stays open.
The crude oil futures market is pricing as if OPEC+ is going to be able to deliver on its higher output quotas, and that there will also be additional crude available from former OPEC+ member the United Arab Emirates, as well as from Iran.
Brent contracts were trading around $71.72 a barrel in early Asian trade on Monday, down from the close of $72.12 on July 3 and also below the $72.48 finish on February 27, the day before the U.S.-Israeli attack on Iran.
SUPPLY GLUT
The crude futures market appears to be pricing for a return to the oversupply narrative that prevailed prior to the Iran war.
If supply chains can be restored and OPEC+ and non-OPEC producers are able to deliver increased production, then this narrative is justified.
Apart from the obvious risk of a return to some form of conflict between the United States and Iran, there are also other factors that may come into play.
Part of the reason that Brent prices did not surge any higher than $126 a barrel during the Iran war was that China, the world’s biggest crude importer, dramatically cut back on purchases.
China’s seaborne imports dropped to the lowest in more than a decade in June, with Kpler assessing arrivals of 5.84 million bpd, or about half of pre-war levels.
The buying strike seems set to continue in July, with Kpler tracking imports of just 5.31 million bpd, although this figure will be revised higher as more cargoes for July arrival are assessed.
The question is when will China return to the crude market, and if past experience is any guide, it will be when refiners deem the crude price to have fallen far enough.
China has a strong track record of boosting imports when prices fall, and cutting back when they rise, with the pattern being supercharged during the past few months.
It’s likely that smaller, independent refiners will return to the market before the major state-owned players, and by August it would not be a surprise to see imports from these plants increase.29dk2902l
If prices do remain weak, then China’s larger refiners are also likely to resume purchases, although it will take until at least the fourth quarter for these to show up in import data.
Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn and X.
The views expressed here are those of the author, a columnist for Reuters.
(Editing by Jacqueline Wong)
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