OPEC+ approves August output increase as oil market gradually stabilises

OPEC+ agreed on Sunday to raise its collective oil production target by a further 188,000 barrels per day (bpd) from August, extending its phased supply increase despite ongoing disruptions to exports from the Gulf and continued weakness in global oil demand.

The decision, announced after an online meeting of the producer alliance, follows similar production increases approved for June and July as the group gradually reverses voluntary output cuts introduced in 2023.

The seven countries responsible for managing OPEC+'s monthly production policy have now increased their combined output targets by nearly 800,000 bpd between April and July. However, much of the additional supply has yet to reach the market after the U.S.-Israeli war with Iran disrupted exports by closing the Strait of Hormuz to tanker traffic serving key producers, including Saudi Arabia, Kuwait and Iraq.

According to OPEC data, the group's production declined from 42.77 million bpd in February to 33.13 million bpd in May before beginning a partial recovery in June as U.S. efforts helped the United Arab Emirates and other Gulf producers resume exports. Even so, production remains below pre-war levels.

Oil prices, meanwhile, have retreated to where they traded before the conflict despite the tighter supply environment. The decline has been driven by weaker Chinese crude imports, higher exports from producers outside the Middle East and a record release of strategic oil reserves coordinated by the International Energy Agency.

Brent crude settled near $72 a barrel on Friday, down sharply from recent highs above $120 a barrel and broadly back to levels seen before the United States and Israel launched military strikes against Iran on February 28.

UBS analyst Giovanni Staunovo said the latest increase had been widely anticipated, adding that the market's immediate attention would remain on how quickly tanker traffic through the Strait of Hormuz normalises and whether Chinese crude demand rebounds.

Market sentiment has also been supported by a memorandum of understanding between Washington and Tehran aimed at ending the conflict, reinforcing expectations that oil supplies will gradually return to normal.

Beyond production policy, OPEC+ is also dealing with internal challenges after the United Arab Emirates withdrew from the alliance and Iraq sought a larger production quota.

Although OPEC+ comprises 21 producing countries, monthly output decisions are currently managed by seven core members: Saudi Arabia, Russia, Iraq, Kuwait, Algeria, Kazakhstan and Oman.

The seven producers are unwinding a 1.65 million bpd voluntary production cut agreed in 2023. Following the UAE's withdrawal from the alliance on May 1, Reuters calculations show the remaining members will still have about 379,000 bpd of those cuts left to restore after the August increase.

If the group approves another production increase of a similar size at its next meeting, scheduled for August 2, the remaining 2023 voluntary cuts would be fully reversed.