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Chief economist update: A delicate balancing act

"The demand picture has shown clear signs of improvement."

So declared Saudi Arabia's oil minister Prince Abdulaziz bin Salman as the OPEC+ group of oil producing nations met and decided to gradually increase oil production in July.

The OPEC+'s online meeting on 1 June 2021 saw oil ministers from member nations agree to raise oil production by 441,000 barrels per day (bpd) in July, with Saudi Arabia -the swing producer - adding 400,000 bpd more.

The consequent jump in crude oil prices justify the Saudi oil minister's declaration and, at the same time, the oil market's belief that the supply increase remains insufficient to meet growing demand - recently reinforced by the OECD's upgrade to global growth.

In its 'Economic Outlook, May 2021' report, the OECD upgraded its global GDP growth forecast to by 5.8% this year and by 4.4% in 2022. This compares with the 5.6% and 4.0%, respectively, it forecast in March and a sharp upgrade from the 4.2% (for 2021) and 3.7% (for 2022) predicted in its December 2020 report.

The price of Brent oil rallied to US$71.20/barrel and WTI oil soared to US$68.83 a barrel. This year to date, the price of Brent oil has surged by 41.4 and that of the WTI has risen by 45.0%.

Not promising anything, OPEC+ will review its production policy again on July 1. They're right to do so.

This is because the outlook remains fluid and uncertain. Despite increased coronavirus vaccinations and reduced cases in the advanced economies, the resurgence of infections (currently doing its rounds in Asia, Latin America and including Australia's state of Victoria) could restrain the global recovery and weaken overall demand for oil.

Already, the small increase in oil output has put further upward pressure on prices (as we've seen) - one, that's bound to act as an impediment to continued improvement in global growth. Rising oil prices, after all, are a tax on consumption.

OPEC+ is also balancing its output decision on whether or not Iranian production would come on stream if or when the US eases its sanctions which, according to the New York Times, "could increase its crude production to four million barrels a day from 2.4 million over the next year".

There's also the not so small issue with US oil producers. Rising oil prices make their investments more feasible and cost effective which, overall, increases the oil supply.

The Baker and Hughes rotary oil rig count has reached a 13-month high of 359 rigs as at the end of May - up by 30.5% so far this year and by a whopping 109% since it dropped to a 15-year low of 172 rigs in August 2020.

Read our full COVID-19 news coverage and analysis here.