Oil prices, which had surged as much as 30% amid growing expectations of the Strait of Hormuz reopening, have fallen to the upper $60s, a level seen before the Iran war. Now, with OPEC+, the alliance of oil-producing nations, deciding to increase output for a fifth consecutive month to make up for blocked exports, and with demand for Gulf crude also declining, concerns over oversupply are emerging.
According to Reuters on Friday, OPEC+ said in a statement that day that it had agreed to raise daily production quotas by a further 188,000 barrels starting in August. OPEC+ is an alliance of 11 member countries of the Organization of the Petroleum Exporting Countries (OPEC) and 10 non-OPEC oil-producing nations. Among them, seven countries — Saudi Arabia, Russia, Iraq, Kuwait, Algeria, Kazakhstan and Oman — have been discussing crude production plans through monthly meetings.
The reason oil-producing nations are increasing output is to cover revenue losses caused by halted trade. Brent crude, which had topped $100 per barrel during the Iran war, traded at $71.61 during the session on Saturday. On the New York Mercantile Exchange, U.S. West Texas Intermediate (WTI) crude for August delivery also recorded $68.30 per barrel during the session.
The declines reflect factors including reduced imports by China, the world's largest crude importer, expanded crude exports by non-Middle Eastern producers, and the largest global strategic petroleum reserve release ever conducted by the International Energy Agency (IEA). It is also partly due to growing expectations of price stabilization as shipping volumes through the Strait of Hormuz have gradually increased recently. When prices fall like this, supply should be reduced, but oil-producing nations that depend heavily on crude exports for a substantial portion of their state finances are tempted to expand supply.
However, such moves heighten concerns about oversupply in the crude market. The global crude supply market was already in an oversupply situation before the Iran war broke out. In response, OPEC+ briefly suspended output increases until the first quarter of this year. But it decided to raise output by a total of 206,000 barrels per day in April and May, and by 188,000 barrels per day in June and July. If OPEC+ continues output increases for September at its meeting on Aug. 2, the effect of the average daily cut of 1.65 million barrels implemented in 2023 over oversupply concerns will disappear.
In addition, there are supply-increase factors in the market that cannot be controlled. The United Arab Emirates (UAE), which withdrew from OPEC and OPEC+ in May, is likely to increase output to boost revenue. On top of this, Iraq, an OPEC+ member, is demanding an upward revision of its production quota. Russia is also pushing out exports as its crude storage facilities have been damaged by Ukrainian drone attacks. As a result, crude shipments through Russia's western ports hit a record high last month, and this trend is expected to continue in July.
There is, however, a counterargument that actual production is not keeping pace with the output increase plans. According to OPEC, OPEC+'s daily production fell from 42.77 million barrels in February to 33.13 million barrels in May. According to data compiled by Kpler, June exports stood at 9.62 million barrels per day, nearly half the average of 18.4 million barrels per day over the three months preceding the Iran conflict.
Experts analyze that the key to future crude prices lies in the pace of recovery in Strait of Hormuz shipping volumes and the timing of China's import expansion. China, the world's largest crude importer, imported 5.84 million barrels of seaborne crude per day in June, a 10-year low. Clyde Russell, a Reuters energy columnist, predicted that "it will take at least four quarters for the increase in China's crude imports to show up in actual data."
