A group of oil producers led by Saudi Arabia and Russia agreed to continue unwinding steep cuts they made at the start of the pandemic, according to people familiar with the discussions, as economic reawakenings around the world boost demand for crude and an assortment of other commodities.
OPEC+, as the group of producers calls itself, agreed Tuesday to a previously planned output increase of about 450,000 barrels a day, starting next month, according to these people. Saudi Arabia, meanwhile, agreed to continue easing separate, unilateral cuts of one million barrels a day that it put in place earlier this year, these people said.
In April, the group agreed to hike output by more than two million barrels a day by the end of July, bringing cumulative additions over the past year to some four million barrels a day. That is a big chunk of the 9.7 million barrels a day the group agreed to cut early in 2020, when the new coronavirus first started shutting down economies, sapping global crude demand and sinking prices.
Now, with infection rates generally in check in much of Asia and China—the world’s biggest oil consumer—and vaccine drives in the U.S. and Europe plowing ahead, the Saudi-led Organization of the Petroleum Exporting Countries and a group of non-OPEC producers led by Russia are betting markets are ready again for more oil.
Ahead of the widely expected move, Brent crude, the international benchmark, rose more than 2%, passing $71 a barrel, on track for its highest close since May 2019. West Texas Intermediate futures were up almost 3% at over $68 a barrel. The U.S. gauge on Tuesday crossed its highest level since October 2018.
Those price milestones come alongside similar moves by a range of other commodities—from tin and copper to lumber. They have all soared as demand pent up during the pandemic is increasingly unleashed, and producers struggle to keep up.
Demand for oil and other commodities has mirrored the huge swings in global economic activity during the pandemic. After falling sharply as large parts of the global economy were placed in suspended animation during the second quarter of last year, oil demand has rebounded as many rich economies have thawed over recent months.
Strong demand for an array of goods that helped households and businesses adapt to the constraints of living with the coronavirus had pushed global industrial production above its pre-pandemic peak by the end of last year. Growth since then has left the world’s factories hungry for energy and raw materials as a result.
Demand is set to rise further this year as the global economy is forecast to record one of its fastest expansions in many decades. The Organization for Economic Cooperation and Development said Monday it expects global output to increase by 5.8%, which would be the strongest expansion since 1973.
Soaring demand for commodities to feed that expansion could act like a brake if supply can’t keep up. The recovery in oil demand and oil prices has contributed to a pickup in inflation around the world. Figures for the eurozone released Tuesday showed consumer prices were 2% higher in May than a year earlier, the fastest rise since late 2018. But much of that rise was down to energy prices, which were 13.1% higher than a year earlier.
Central bankers have said they expect inflationary pressures to ease toward the end of the year as commodity producers and factories respond to higher prices by raising production. OPEC’s move Tuesday underpinned that view.
“We have rising oil and commodity prices, and we also have some weird effects because of changes in the pattern of consumption,” said
the OECD’s chief economist. “But this should fade as the supply response kicks in.”
A technical committee of the OPEC+ group on Monday forecast oil demand will jump by 6 million barrels a day in the second half, according to OPEC delegates. As a result, global oil stocks will fall below their five-year average for the 2015-2019 period by the end of July, signaling an end to the pandemic glut, they predicted. Delegates said such calculations didn’t take into account any new oil from Iran, which is negotiating a resumption of a deal with the West that could lift sanctions on its oil—and add further global supplies.
“If the market outlook darkens, then we would expect a much more contentious conversation about which producers should sit down their barrels to make room for Iran,” said Helima Croft, the chief commodity strategist at Canadian broker RBC. For now, however, OPEC’s Secretary-General
said he expected Tehran’s return “will occur in an orderly and transparent fashion.”
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