As oil demand picks up, OPEC’s discipline will be tested

“THE DEMAND picture has shown clear signs of improvement.” So declared Abdulaziz bin Salman, the energy minister of Saudi Arabia, at a virtual gathering of the Organisation of the Petroleum Exporting Countries (OPEC) on June 1st. The cartel and its allies, chief among them Russia, have been squeezed badly by the covid-induced recession, which cut global demand for oil from nearly 100m barrels a day (bpd) in 2019 to 91m last year. In a frantic effort to prevent a price collapse, OPEC+, as the group calls itself, agreed to cut output in early 2020. Yet it failed to stop the price dipping below $20 a barrel (see chart).

Now the cartel believes that oil demand is at last on a firm path to recovery. Ministers agreed to boost supply by roughly 450,000 bpd in July, part of their plan to restore nearly half of the output cuts made last year. Saudi Arabia, which boasts the lowest production costs and the most spare capacity in the cartel, and often acts as a swing producer, indicated it would also soon reverse a unilateral output cut of 1m bpd made earlier this year.