OPEC+ producers are increasing output in the face of a global economic downtown. This will be a major test for non-OPEC producers, but OPEC+ seems confident that time is on its side.
A pumpjack works on a pad near a housing development in Dacono, Colorado, July 4, 2024. (AP Photo/David Zalubowski, File)
When eight OPEC+ producers decided May 3 to accelerate production increases, they cited “healthy oil market fundamentals,” but the market is ailing. There are more plausible motivations for increasing output in the face of a global economic downturn: to punish the cheaters within OPEC+, to earn goodwill from the U.S. administration before President Donald J. Trump’s upcoming trip to the region, and to test the response of U.S. shale producers. But with each of these motives, there are associated risks.
In a May 3 virtual meeting, eight OPEC+ states with voluntary production cuts announced they would raise output by 411,000 barrels per day in June. The group had already decided to accelerate production increases in May by the same amount – three times faster than the more conservative plans laid out in March. The unmistakable message is that Saudi Arabia and others are tired of production restraint and ready to probe the response of non-OPEC producers.
Russia figure includes CPC blend, about 90% of which is estimate to be Kazakh origin. Source: Kpler
Unsurprisingly, oil prices dropped when markets opened this week. Brent crude oil prices fell on May 5 to $60 per barrel, and West Texas Intermediate – the main U.S. crude oil benchmark – declined to $57/bbl, a level not seen since the early post-coronavirus recovery. Even before the latest OPEC+ surprise, Trump’s chaotic trade policy had spooked the oil market. Now the entire oil industry is bracing for a period of lower oil prices and reduced spending.
In throwing down this gauntlet, a first priority is to remind OPEC+ members of the perils of overproduction. Periodically, when OPEC countries focus more on growth rather than adherence to quotas – such as Venezuela’s oil opening in the 1990s – de facto leader Saudi Arabia resorts to flooding the market to enforce discipline. The current situation is less clear cut, but Saudi Arabia, the United Arab Emirates, and other producers are frustrated by quota busting. Kazakhstan in particular is producing some 390,000 b/d above its reference production volume and has stated that it will prioritize national interests as it ramps up output at the Tengiz expansion. Iraq is another perennial cheater. Both countries have submitted several iterations of “compensation cuts” to atone for their past sins and not only abide by assigned production volumes but make even deeper cuts. These plans have been habitually ignored.
What are the potential consequences for these countries in the months to come? They and all other OPEC+ states will suffer from lower oil revenue if prices fall. Squeezing Iraq may have the desired effect, since the oil-dependent country requires an estimated $87/bbl to balance its current account. But in the case of Kazakhstan, the move may backfire. The country may simply leave OPEC+ if it judges that the benefits outweigh the cost of losing a seat at the producers’ table. There are plenty of past precedents, including Angola’s recent departure.
A second driver for Saudi Arabia and the other Gulf Arab producers may be to curry favor with the Trump administration, especially in advance of the president’s upcoming trip to the region. The Gulf states are familiar with Trump’s hands-on approach to oil market management, and he has already leaned on them in recent months to increase production and help lower the price of energy for U.S. consumers. The payoff for Riyadh and Abu Dhabi in driving down oil prices is not entirely obvious. Oil and gas are already exempt from Trump’s “reciprocal” tariffs, and these countries rightly believe they will be valued partners for the administration. Still, they may want to stay on the good side of a rather unpredictable head of state. Saudi Arabia also has an interest in securing U.S. support for a civil nuclear program, and both Riyadh and Abu Dhabi want stronger U.S. security commitments. The U.S. Congress may balk at some of these policy changes. But, otherwise, there is less to lose for the Gulf states in pursuing this strategy of offering a short-term win for Trump – except for the minor issue of needing to absorb lower oil prices for months to come.
The last motivation for output rise is to pressure non-OPEC oil producers, especially the United States. Since 2022, OPEC+ has made deep production cuts – both scheduled, groupwide cuts and additional voluntary reductions by selected producers. The reductions may have helped prevent even lower oil prices, but they have failed to produce a durable revenue increase. Lower production plus lower revenue per barrel is a bad combination. Now, OPEC+ has called time on output cuts and is apparently moving to recapture market share.
OPEC+ smells blood in the U.S. shale patch. With WTI in the $60/bbl range in the wake of Trump’s tariff announcements, oilfield service companies were already anticipating a drop-off in capital expenditures. Now, the mood has turned decidedly bearish. A widely circulated May 5 letter to shareholders from U.S. shale producer Diamondback Energy argued that “we are at a tipping point for U.S. oil production at current commodity prices.” U.S. producers are likely to cut capital expenditures and curb drilling and completion activity. In the current OPEC+ decision to ramp up output in the face of economic uncertainty, there are echoes of the 2014 decision by Saudi Arabia’s former oil minister, Ali al-Naimi, to defend market share and avoid production cuts.
Source: IMF World Economic Outlook database, April 2025
A price war is not without risks. The Gulf Arab states may be confident that the U.S. summer driving and seasonal strength elsewhere will support the market in the coming months. But greater risks could materialize heading into the fall. The forward curve for Brent crude – showing the current price at which one can buy or sell crude for future delivery at various dates – suggests the market believes fundamentals will loosen later this year. OPEC+ messaging today may reset those expectations. If not, the eight producers ramping up output have signaled they could pause or reverse the supply additions.
For now, the oil industry is preparing for a downturn, thanks to weaker macroeconomic conditions and expectations that OPEC+ will ramp up supply. This will be a major test for non-OPEC producers, and this time around, OPEC+ seems more confident that time is on its side.
The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.
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