Oil producers’ group OPEC+ decided to up its production levels despite weak crude prices in what is being seen as a bid to hold on to its market share in a tough economic environment.
At their meeting on Saturday, eight members of OPEC+, a select group of Russia-led oil producers and the Organization of the Petroleum Exporting Countries (OPEC) spearheaded by Saudi Arabia, opted to raise collective production levels for July by another 411,000 barrels per day.
Producers Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman cited “healthy market fundamentals and low oil inventories” as the reasons behind the move indicating their belief that the global oil market can absorb the additional supply.
The decision over the weekend was third consecutive output hike of 411,000 bpd announced by OPEC+. Earlier in May, it agreed to up oil production for a second consecutive month, raising output for June by a similar volume.
That June hike by OPEC+ took the total combined production increases for April, May and June to 960,000 bpd, or 44% of the 2.2 million bpd of previously agreed cuts since 2022. The latest hike implies a higher unwinding of over 1.37 million bpd (or 62%) from July.
More OPEC+ Barrels May Flow
In a statement, OPEC+ also noted: “The gradual increases may be paused or reversed subject to evolving market conditions. This flexibility will allow the group to continue to support oil market stability.”
The group is scheduled to meet on July 6 to decide on its production levels for August, the week of OPEC’s International Seminar – an event it organizes every two years to draw in major industry players. Barring a considerable deterioration of the macroeconomic climate, another production hike appears to be on the horizon next month as well.
The move is a clear bid for a greater market share at the expense of non-OPEC producers, especially U.S. light sweet crude suppliers. Investment banks and other forecasters are scrambling to lower their oil price forecasts while the International Energy Agency is forecasting a market surplus.
But there is another strategic reason behind the move by OPEC+ heavyweight and de facto leader Saudi Arabia – that of disciplining errant overproducing fellow members alongside non-OPEC competitors.
They include the likes of Iraq and Kazakhstan, which have repeatedly exceeded their oil production quotas. For instance, the latter exceeded its March target by 422,000 bpd.
A Glut Beckons
As a result, squeezed profit margins loom large for the entire oil industry if prices remain low. That is the likely expectation on Wall Street courtesy of higher production from OPEC+ as well as non-OPEC producers like the U.S., Brazil, Canada and Guyana. And despite a claim by OPEC+ of falling inventories, the latest data on oil storage is sending bearish market signals.
According to the IEA, global inventories continue to remain elevated. In its market assessment published on May 15, it said inventories rose for a second consecutive month to 7.7 billion barrels in March.
While the said figure may be below the five-year average, a change in sentiment appears to be pretty clear. For the IEA currently expects oil inventories to rise by an average of 720,000 bpd this year, and by 930,000 bpd in 2026.
If this drags OPEC+ producers and their competitors toward a full-blown glut, another tussle for market share at low prices beckons.
Disclaimer: The above commentary is meant to stimulate discussion based on the author’s opinion and analysis offered in a personal capacity. It is not solicitation, recommendation or investment advice to trade oil stocks, futures, options or products. Oil markets can be highly volatile and opinions in the sector may change instantaneously and without notice.
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