Top oil producers agree on modest supply boost amid demand concerns

Saudi Arabia, Russia and other key oil producers agreed on Thursday to another marginal increase in output, bolstered by risks to demand amid coronavirus restrictions in China.

Russia's invasion of Ukraine has added to supply concerns, which have increased with Europe's announced moves on a potential Russian oil embargo.

But in short back-to-back meetings on Thursday, OPEC+ members reconfirmed "the decision to adjust upward the monthly overall production by 0.432 mb/d for the month of June," the group said in a statement.

Prices had soared on Wednesday, with Brent North Sea crude closing above $110 a barrel, its highest level in two-and-a-half weeks.

At around 0945 GMT on Thursday, Brent stood at $110.47 a barrel and American WTI at $107.83 a barrel.

But analysts had widely expected the Organization of Petroleum Exporting Countries (OPEC), led by Riyadh, and their 10 partners led by Moscow to stay the course.

"It is likely that OPEC will stick with its plan despite ongoing instability relating to the Russia-Ukraine conflict," XTB analyst Walid Kudmani told AFP ahead of the meeting, citing "prospects of falling demand due to widespread lockdowns seen in China as a result of rising Covid cases".

As in previous months, the cartel continued to open the taps slightly, a strategy begun in the spring of 2021 when the economy began recovering after the drastic cuts imposed amid the shock of the pandemic.

Thursday's talks via video conference began with technical discussions at the ministerial committee meeting around 1100 GMT and lasted less than an hour.

China, grounds for 'caution'

Largely spared for two years, China in recent weeks has been battling its worst coronavirus outbreak since the spring of 2020 which has strained its zero-Covid strategy.

Beijing on Wednesday closed dozens of metro stations and residents fear their city will be locked down, as is already the case in Shanghai, the country's largest city with 25 million people.

"The slowing activity in China is certainly a factor that will justify their decision to stay put, faced with the mounting international pressure to increase production to address the worsening global energy crisis," Ipek Ozkardeskaya, an analyst at Swissquote bank, told AFP ahead of the meeting.

This is "a reason to remain cautious," said Fawad Razaqzada, analyst at City Index and Forex.com.

As for the new economic sanctions planned against Russia, they were also not expected to move the needle for the moment.

In its sixth package of sanctions, the European Commission is seeking a ban on all Russian oil, crude and refined, transported by sea and pipeline by the end of 2022, European Commission President Ursula von der Leyen told the European Parliament.

'Huge impact'

That prospect threatens supply in an already tense European market.

While unanimity among the 27 EU member states is required for the sanctions to go forward, Hungary, which is highly dependent on Russian deliveries, rejected the project in its current form.

"If it (the EU) manages to convince its members to ratify the plan... then this will have a huge impact on Russian oil exports," Razaqzada said.

But once again the OPEC+ alliance, anxious to remain united and avoid upsetting Moscow, will "certainly not save the day," Ozkardeskaya said ahead of the meeting.

"The cartel made clear that the Ukraine war -- that impacts the Russian exports -- is not cause for concern," she said.

Stephen Innes, an analyst at SPI Asset Management, said OPEC+'s wait-and-see approach was "increasingly untenable" and "contrary to its mission statement".

"(It's) why they have fallen under constant criticism for being slow and technically unprepared to react to recent developments in global markets," he said.

But does OPEC+ really hold the key to price stabilisation? Between a lack of investment in oil infrastructure in some member countries and operational problems, the cartel regularly fails to meet its production quotas.