OPEC's new supply shock nails on oil market's return to surplus
Oil futures slumped 11% over the past two weeks in London, quickly shrugging off the Israel-Iran conflict and suggesting traders are not convinced extra barrels are vital. Goldman Sachs Group Inc. and JPMorgan Chase & Co. have been predicting a further slide towards $60 this year as Chinese consumption falters and Trump's trade tariffs cast a shadow across the global economy.
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Broad Support
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Eight of the alliance's key members decided during Saturday's video-conference to restore 548,000 barrels a day of halted output in August. It's a marked step-up from the 411,000-barrel hikes set for May, June and July, which were already triple the volume initially scheduled for those months.
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OPEC+ will consider another 548,000-barrel tranche for September at a meeting on Aug. 3, a step that would complete the reversal of a 2.2 million-barrel cutback — made back in 2023 — a year earlier than previously envisioned.
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The actual supply impact on oil markets will likely be smaller than advertised, as Saudi Energy Minister Prince Abdulaziz bin Salman pressures countries that previously exceeded their production quotas to forego their share of the hikes. Russia and Iraq are showing some signs of compensation, though Kazakhstan continues to cheat.
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'The official return of barrels is one thing, but actual new supply versus the headline numbers is another,' said Doug King, chief executive officer of RCMA Capital LLP. 'Diesel premiums are showing the market undersupply. So unless we see physical weakness via visible inventory increases, I don't see a path lower for crude prices.'
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Officials also stress that the supply additions can be 'paused or reversed subject to evolving market conditions.' But unless they exercise that option, the extra barrels already rubber-stamped will almost inevitably deepen a slide in prices.
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That would likely mollify President Trump's repeated calls for cheaper fuel costs to staunch the cost-of-living crisis that hurt his predecessor. Trump also has to fend off inflation while lining up a raft of tariffs, and agitating the Federal Reserve to lower interest rates.
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Yet the rout will take a toll on America's oil industry, from corporate giants like Exxon Mobil Corp., to the shale explorers who widely backed Trump's bid to reclaim the White House. Shale executives said in a recent survey they expect to drill significantly fewer wells this year than planned at the start of 2025 as prices falter.
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And the pain may well ripple through OPEC+ itself.
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Saudi Arabia needs more than $90 a barrel to cover government spending, as Crown Prince Mohammed bin Salman embarks on a radical plan to transform the desert kingdom's economy, according to the International Monetary Fund. Riyadh is grappling with a soaring budget deficit, and has been forced to slash spending on some of the prince's flagship projects.
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If Riyadh tires of the financial strain, it could opt to pull supplies back off the market again.
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'They do have the option of a volte-face,' said Neil Atkinson, an independent analyst and former head of the IEA's oil markets and industry division. But in the meantime, 'there's no alternative but to ensure market share and accept lower prices. You might as well accept the world for what it is, which is what they're doing.'
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