Opec+ sticks to plan to raise output in October: Update

Adds revised 2022 demand outlook in paragraph 4

The Opec+ alliance has decided to stick with its plan to increase crude production next month. As agreed in July, the group's collective quota will rise by a further 400,000 b/d in October.

Today's relatively short and straightforward ministerial meeting provides the market with some certainty following a period of volatility and is in stark contrast to the group's previous discussions in July that were prolonged by a disagreement with the UAE over policy.

"While the effects of the Covid-19 pandemic continue to cast some uncertainty, market fundamentals have strengthened and OECD stocks continue to fall as the recovery accelerates," an Opec secretariat statement said.

Today's decision to go ahead with the October production increase was supported by a bullish outlook on next year's global oil demand growth presented by the group's Joint Technical Committee (JTC). The JTC — which met yesterday to discuss market conditions — considered a base case scenario in which world oil demand grows by 4.2mn b/d in 2022, delegates said. This marks a steep hike from the 3.28mn b/d growth that was forecast in Opec's most recent Monthly Oil Market Report (MOMR) and that featured in the JTC's initial report. The 4.2mn b/d figure is likely to be adopted in the next MOMR, according to one delegate.

The increase in Opec+ supply coincides with a sharp rise in Saudi Arabia's production in recent months after Riyadh unwound an additional 1mn b/d cut that it made unilaterally in February-April. And Saudi Arabia, alongside other Opec+ members such as Iraq, has encountered difficulties selling this extra oil. This, together with recent pressure on oil prices from rising Covid-19 infection rates in key demand centres such as the US and Asia-Pacific, raised the question as to whether the planned quota hike would be necessary for October. But prices have since recovered and signs that the market will stay tight, for the rest of this year at least, have persuaded the alliance that there is no need to deviate from the plan it agreed in July.

The JTC's base case sees OECD oil inventories remaining below the 2015-19 average for the remainder of this year. The scenario does see a supply surplus in 2022, but the group has left itself room to adjust its current policy if necessary and has committed to continue its monthly meetings, with the next one scheduled for 4 October.

As it stands, the policy is to increase the collective production target by up to 400,000 b/d each month until April next year and by 432,000 b/d from May next year until the group's remaining cuts are fully unwound. The arrangement allows a three-month window to halt the hikes if market fundamentals warrant it. The monthly increases must be confirmed at the ministerial meetings.

The group also agreed today to extend the deadline for its compensation mechanism to the end of December, from the end of September previously. Member countries that have exceeded their production ceilings must submit compensation plans by 17 September.

By Rowena Edwards, Ruxandra Iordache, and Nader Itayim