Emirates NBD expects oil prices to be high over the coming quarters, targeting Brent at $120/barrel on average in third quarter (Q3) and $115/b in Q4.
Opec+ agreed to increase production in August by 648,000 barrels per day (bpd), effectively endorsing a plan announced earlier in June.
According to Emirates NBD, there was no commentary in the Opec+ statement about whether the production adjustment, the group’s name for its coordinated production policies, would extend beyond September as, in principle; the increase for August would unwind all of the cuts made by Opec+ during the Covid-19 pandemic.
Production targets for August at a national level have Saudi Arabia at 11mn barrels per day (bpd), a level it has only reached briefly in the past and most recently in April 2020 when it was locked in a price war with its now partner Russia.
For the UAE, the target level of 3.179mn bpd should be achievable given the country has made substantial investment into its upstream capacity, hitting 4mn bpd of capacity back in 2020.
Russia’s target level of 11mn bpd looks like a particular challenge to achieve given the country’s crude exports are set to be under sanction from the EU and are already being disrupted by firms choosing to self-sanction trade in Russian oil.
“The absence of any discussion of what happens once all the pandemic-related cuts will be a concern for an oil market that is screaming out for additional barrels. Spot prices have come off since the start of June as financial markets generally price in an imminent global recession but time spreads, both in the futures and physical market, remain exceptionally tight,” noted Edward Bell, senior director (Market Economics) at Emirates NBD.
Market signals for the health of demand in H2, 2022 and beyond are mixed. Early indications that the Zero-Covid induced slump in Chinese economic activity has bottomed could set up for a bounce in activity.
At the same time growth in the US is evidently slowing: personal spending has come in lower than expected for May and a trend of slower growth looks to be firming up.
“Even if there are broad downside risks to demand, we don’t think that they will outweigh the supportive factors for oil prices.
“Opec+ is unlikely to be able to hit its targeted increase on aggregate over the next two months given most countries have been failing to hit their lower prior levels and how long Saudi Arabia can maintain production of 11mn bpd or higher is an open question,” Emirates NBD said.