Oil prices to drop further on OPEC+ supply, but risks still loom

Oil prices slipped on Monday as traders focused on rising supply and the slow return of Gulf exports through the Strait of Hormuz.

Brent crude fell to around $71.88 a barrel, while West Texas Intermediate traded near $68.58.

The decline followed OPEC+’s decision to add another 188,000 barrels per day from August and the gradual reopening of Hormuz after the June 17 US-Iran memorandum.

OPEC+ keeps adding barrels, even if the numbers are soft

OPEC+ is still trying to put more oil back into the market, even as prices slide toward pre-war levels.

Seven core members, including Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Algeria and Oman, agreed on Sunday to raise production targets by 188,000 barrels per day starting in August.

The move follows similar increases for June and July, and marks another step in unwinding the 1.65 million bpd cut agreed in 2023.

In theory, that should add fresh pressure to prices, but in practice, the numbers are messier.

The war with Iran and the closure of the Strait of Hormuz meant earlier OPEC+ increases were mostly paper barrels, because several key producers could not fully export what they were allowed to pump.

Tony Sycamore, market analyst at IG, told Reuters the quota increase was “largely in line with expectation,” but added that with the UAE out of the group and production still ramping up after the conflict, he was “not sure they mean much at the moment.”

UBS analyst Giovanni Staunovo made a similar point, noting that the group had kept unwinding production cuts as expected, but said the near-term focus would be on how quickly tankers can cross the Strait of Hormuz and how quickly demand, especially Chinese crude imports, recovers.

That paper-versus-reality gap is still large. OPEC+ output fell to 33.13 million bpd in May from 42.77 million bpd in February. It began recovering in June, but remained below pre-war levels.

Gulf exports are bouncing back

The supply picture is improving, but it is not yet normal.

OPEC output rose by 3.3 million bpd in June to 19.43 million bpd, recovering from its lowest level in more than two decades.

Gulf oil exports also jumped by more than 3 million bpd from May to exceed 10 million bpd, though they were still about 40% below pre-war levels.

That is why prices are falling, but also why traders remain cautious. More barrels are leaving the Gulf, yet much of that oil is not necessarily fresh production.

Ole Hansen, head of commodity strategy at Saxo Bank, told AFP that the oil currently leaving the strait had largely been sitting in tankers or storage facilities, adding that “shut-in production takes time to restart.”

He said July should show improvement if shipping continues to normalise, with the pickup likely to accelerate in August.

Russia is adding to the pressure as shipments from the country's western ports hit a record high in June and are expected to stay elevated in July, as Ukrainian drone attacks damaged refineries and pushed Moscow to export more crude instead of processing it domestically.