Despite OPEC+ Production Increase Decision... Supply Shortage Expected to Persist in Q3

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Although OPEC+ announced plans to increase daily oil production until August, analysis suggests that oil supply shortages will persist in the third quarter.

Shim Soo-bin, a researcher at Kiwoom Securities, stated on the 3rd, "OPEC+ announced an increase in daily production by 648,000 barrels in July, expanding the scale of production increase," adding, "It seems difficult for OPEC+'s additional production increase to resolve the supply shortage in the oil market."

OPEC+ explained that the expanded production increase is an early boost by dividing the September production increase into July and August. Considering this, it is expected that the production increase of 648,000 barrels will continue in August. In this case, OPEC+'s production cut agreement is likely to end in August.

Additionally, for oil-producing countries with poor compliance to production cuts, OPEC+ mentioned the fulfillment of unimplemented cuts by the end of December 2022 and announced the submission of supplementary production cut plans by June 17, continuously emphasizing the importance of compliance by all oil-producing countries. The next OPEC+ meeting (30th) will be held on June 30 (local time), where the production volume for August will be decided.

Researcher Shim pointed out, "OPEC+'s additional production increase in July and August can partially buffer concerns about supply in the oil market, but international oil prices closed higher on the day," interpreting that there are limits to meeting oil demand.

Researcher Shim explained, "Comparing the production quotas of OPEC oil-producing countries in July with the producible oil volumes in May, except for Saudi Arabia, the United Arab Emirates (UAE), and Iraq, the producible volumes are similar to or slightly below the July production quotas."

He continued, "Even if OPEC+ grants additional production quotas in July and August, it is highly likely that the actual production increase will be limited to the aforementioned countries," analyzing, "Considering this, the expansion of OPEC+'s production increase is unlikely to lead to a sharp rise in OPEC oil production."

Researcher Shim forecasted, "Moreover, with China's lockdown easing starting June 1 and the third quarter including seasonal demand such as the U.S. driving season, concerns about supply shortages in the oil market will continue."

He added, "Considering the decrease in U.S. crude oil and gasoline inventories, demand for petroleum and petroleum products in the U.S. is also judged to be strong," and predicted, "During the third quarter, a tight supply and demand condition will continue, with a high risk of upward price movement."

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