OPEC released its July oil market report on Thursday. The report turned out to be controversial, since even though the cartel’s experts maintain optimistic forecasts for global oil demand (+6 mbpd this year), it also flagged some disturbing trends. Thus, OPEC expects that US oil production will increase by 530k bpd and reach 11.73 mbpd in 2022, a level close to pre-pandemic records reached by the US oil industry.
In addition, OPEC experts note that the cartel in June saw a slight reduction in OPEC+ oil output, up 590k bpd compared to the previous month. Participation in OPEC+ appears to be weighing increasingly on oil exporters that have been extracting and exporting less than such major producers as Saudi Arabia and Russia. As a result, the position of the UAE, which disrupted the July OPEC+ meeting, alongside media that Iraq is ready to support the Emirates, and not Saudi Arabia in the conflict between the UAE and OPEC+, looks quite understandable, since these countries are afraid of losing their market shares. However, they have been OPEC members for many years, and membership in OPEC of a certain oil-producing country automatically presupposes its participation in a collective reduction of oil production, so it does not make sense that these countries do not rule out withdrawing from OPEC+, instead of continuing to participate in OPEC.
Has the OPEC+ agreement perhaps outlived its usefulness? There are a number of conflicting forecasts regarding the timing of the alliance's existence. Officially, the output cut agreement is valid only until May 1, 2022, and after that date, the participating countries will need to either extend or terminate it.
Global oil demand growth his year and expected growth in 2022 may lead to a situation whereby the oil market will be able to regulate itself through supply and demand, and after that OPEC+ will likely either change its current functions and, conversely, limit growth prices, or else cease to exist. The odds of the latter scenario materializing are low, even though such a large-scale reduction in production would be unprofitable for oil exporters. Indeed, amid fierce competition with US oil, the production of which will climb at high prices, the price equilibrium in the market could be disrupted at any time. This means that OPEC+ will most likely continue to exist after May 1, 2022, especially since the charter of the countries participating in this agreement is of unlimited nature, albeit symbolic. In the near future, our Brent price forecast is in the range of $72-74/bbl.