OPEC+ needs "Goldilocks" production plan, analysts say

A surge in global oil demand could be an incentive for OPEC and its allies to ramp up production, though the group will likely remain cautious in decisions this week, analysts said June 30.

OPEC and its non-member state allies, known collectively as OPEC+, meet July 1 to discuss current market conditions and consider where they stand on production restraint.

OPEC+ agreed in June to relax on restraint as economies ease back on the social restrictions imposed at the height of the pandemic last year. In the US economy, analysts expect federal data to show a significant drain on commercial crude oil inventories and a slight tug on motor gasoline, showing the appetite from the world’s largest economy is improving.

Louise Dickson, an oil markets analyst for Norwegian consultancy Rystad Energy, said that OPEC+ was widely expected to increase production, but will need something of a Goldilocks figure to keep the market in check.

Expectations are that OPEC+ will allow for another 500,000 barrels of oil/day on the market from August. Too hot or too cold could spoil the market mood.

“If OPEC+ goes for an increase below the 500,000 bpd, this could trigger an incredibly tight, high price environment,” Dickson wrote. “Nevertheless, increasing supply cautiously could prove wise given the downside price risks associated with COVID-19, the possible return of Iranian barrels, slipping compliance from Russia and Iraq, a possible mini supply surge from US shale and the prospect of a weaker than expected autumn season.”

From London, Stephen Brennock, an analyst at oil broker PVM, said that Saudi Arabia is clearly in charge of OPEC+ decisions and its decisions have so far been “spot on.” The glut in crude oil inventories built up in 2020 is gone and crude oil prices are up above $70/b, after dipping into negative territory in April last year.

Brennock said that demand indeed warrants more production, but emerging concerns about the Delta variant of the novel coronavirus and the post-summer slump in demand means Saudi Arabia and the broader OPEC+ alliance will move forward cautiously.

“The global oil market is calling out for a substantial increase in supplies, but the Saudis are unlikely to oblige,” he wrote.

The price for Brent oil was up 1.3% as of 08:30 ET to trade at $75.23/b.