To add a second source

By Alex Lawler, Ahmed Ghaddar and Olesya Astakhova

LONDON, July 5 (Reuters) - OPEC+ is expected to agree on Sunday to a new increase in oil production quotas from August, two sources said.

The decision is expected to inject more supply into the global market at a time when oil prices are falling as oil exports gradually resume through the Strait of Hormuz.

Two sources familiar with the thinking of the OPEC+ alliance said the group has tentatively agreed to raise oil production quotas by 188,000 barrels per day in August, in addition to similar increases already approved for June and July. The group is meeting online later today, Sunday.

Seven key countries in the alliance increased their production quotas by approximately 800,000 barrels per day between April and July. The alliance includes the Organization of the Petroleum Exporting Countries (OPEC) and partners such as Russia.

Production recovery begins

This increase remained largely ink on paper due to the US and Israeli war on Iran, which led to the closure of the Strait of Hormuz to tankers sailing from some of the most prominent members of the OPEC+ alliance, such as Saudi Arabia, Kuwait and Iraq.

According to OPEC data, the alliance's production fell to 33.13 million barrels per day in May, compared to 42.77 million barrels per day in February.

Production began to recover in June thanks to US efforts to help the UAE and OPEC+ countries export crude, but shipments remain below pre-war levels.

Despite continued supply disruptions, oil prices have returned to pre-war levels under pressure from factors including declining Chinese imports, increased exports from producers outside the Middle East, and the largest withdrawal from global strategic reserves coordinated with the International Energy Agency.

The memorandum of understanding to end the war helped to reinforce traders' belief that supplies would eventually return to normal levels.

Iraq is pushing for increased production quotas.

Brent crude traded near $72 a barrel on Friday, down from a peak of over $120 a barrel in the recent past. It has returned to levels seen before the US and Israeli attack on Iran on February 28.

Besides agreeing on production targets, the OPEC+ alliance faces other challenges following the UAE's withdrawal from the group, while Iraq has indicated its desire to obtain higher production quotas.

Seven producing countries – Saudi Arabia, Russia, Iraq, Kuwait, Algeria, Kazakhstan and Oman – are working to increase their production as part of the gradual elimination of a 1.65 million barrel per day supply cut agreed upon in 2023 when the UAE was still a member of the alliance.

The UAE withdrew from OPEC and the alliance in late April, seeking to align its production capacity more closely with its actual production levels, away from the production restrictions imposed by the alliance.

According to Reuters calculations, the seven countries have about 379,000 barrels per day of the original tranche to put back into the market starting in August, taking into account the UAE’s exit from the alliance on May 1.

This means that the seven countries could completely reverse the cuts by the end of September if they continue to increase production at the same pace.