US West Texas Intermediate crude oil futures and the international benchmark Brent were down slightly on Monday, but are recovering some of its earlier losses. Vendors are reacting to news that OPEC and its allies have struck a deal to increase production levels. While some traders are expressing concerns about a gross surplus due to the decision, others are concerned that demand may decline at the same time due to the increase in COVID-19 infections.
At 8:08 am GMT, September WTI crude oil futures are trading at $ 70.57, down $ 0.99 or -1.38% and September Brent crude oil is at $ 72.32, down $ 1.27 or -1.73%.
OPEC + agrees to increase oil supply after compromise between UAE and Saudi Arabia
Reuters reports that OPEC + ministers agreed on Sunday to increase oil supply from August to cool prices which hit 2.5-year highs as the global economy recovers from the pandemic of coronavirus.
The group crucially agreed to new production allocations from May 2022 after Saudi Arabia and others accepted a request from the United Arab Emirates (UAE) that threatened the plan.
“We are satisfied with the deal,” UAE Energy Minister Suhail bin Mohammed al-Mazroui said at a press conference. Saudi Energy Minister Prince Abdulaziz bin Salman declined to answer questions on how the compromise was reached.
Details of OPEC + ‘s new plan to boost production
From August to December 2021, the group will increase its supply by an additional 2 million bpd, or 0.4 million bpd per month, OPEC said in a statement. It aims to completely eliminate the cuts by around September 2022, Reuters wrote.
To overcome a July 1 disagreement that led members to withdraw from their regular monthly meeting, OPEC + agreed to new production quotas for several members from May 2022, including the United Arab Emirates, Saudi Arabia , Russia, Kuwait and Iraq.
The UAE will see its benchmark production, from which the cuts are calculated, rise to 3.5 million bpd as of May 2022, from 3.168 million today.
Saudi Arabia and Russia will see their reference levels rise to 11.5 million barrels per day each from the current 11 million. Iraq and Kuwait will see their baselines increase by 150,999 bpd each.
Price Abdulaziz said Nigeria and Algeria could also see their baselines revised. He said OPEC + would adjust its policy if and when Iranian oil returned to the market if the country reached an agreement with world powers on its nuclear program.
It is estimated that Iran will be able to add around 1.5 million barrels a day to the global supply once the deal is struck and Western sanctions lifted.
With OPEC + production increases on the sidelines, traders are likely to refocus some of their attention on demand due to the increase in COVID-19 cases around the world. Prices could collapse further in the short term if demand decreases as supply increases. Sellers could start to take control if reports start to show a slowing global economy.
Reuters wrote that global economic growth is starting to show signs of fatigue as many countries, particularly in Asia, struggle to curb the highly contagious Delta variant of the coronavirus and have been forced into some form of lockdown.
Meanwhile, economists at Bank of America lowered their forecast for economic growth in the United States to 6.5% this year, from 7% previously, but maintained their forecast of 5.5% for next year.
Crude oil traders will be watching if other economists start to downgrade their growth forecasts in the United States. The market will struggle to recover to the July high if growth declines.
For an overview of all of today’s economic events, check out our economic calendar.
This article originally appeared on FX Empire