OPEC+ surprised markets, which had anticipated it would stick to the current deal. The group had been expected to completely unwind production cuts by September, with OPEC+ production targets rising by 432kbpd in July, August, and September. Instead, today’s decision brought forward the full unwinding of the production cuts, resulting in an increase of OPEC+ production targets by 648kbpd in July and August, to be shared pro-rata among participants.

But will the target increase actually translate into a meaningful uptick in the number of real barrels reaching the oil market? The group was already struggling to add production in line with the deal in recent months, and many OPEC+ member states have already hit their capacity limits. That means effective production increases will likely be about half of the target increase, with not many additional OPEC+ barrels hitting the market as a result of a faster unwinding of production cuts. With the group having fully unwound the production cuts this summer, it can now address potential Russian oil disruptions due to sanctions. That said, the group’s spare capacity is dwindling, with limited volumes to tackle larger disruptions. For example, Saudi crude production is anticipated to be at 11mbpd in August, with the country’s production capacity standing at around 12mbpd. We continue to advise risk-taking investors to add long positions in longer-dated oil contracts in Brent or to sell Brent’s downside price risks.
Source: UBS