For most of this decade, the OPEC+ alliance has been the world’s most stalwart defender of high oil prices. In just a few moments this week, that role reversed dramatically.
In a video conference on Thursday, the coalition of crude producers led by Saudi Arabia and Russia was expected to simply remind errant members to respect their output limits, ahead of rubber stamping its existing plan to gradually raise production.
Instead they delivered a major shock — increasing supply by three times the planned amount in May in what delegates described as a deliberate effort to drive down prices to punish the group’s cheats.
After many months of excess production from Kazakhstan and Iraq, Saudi Energy Minister Prince Abdulaziz bin Salman reached the limit of his patience, delegates said, asking not to be identified because the talks were private. The larger-than-expected May output hike would just be an “aperitif” if those countries didn’t improve their performance, the prince said on the call.
Prince Abdulaziz’s gambit — a marked break from years of urging OPEC+ to remain cautious in adding supplies — illustrates the toll taken on the alliance as its effort to balance global oil markets drags on far longer than initially envisioned. For some observers, it stirs echoes of the price war that briefly erupted between OPEC+’s leaders during the 2020 pandemic.
Crude was already reeling from the onslaught of trade tariffs announced by President Donald Trump the previous day, and the surprise addition of 411,000 barrels a day by OPEC+ in May turbo-charged the rout.
See also: OPEC+ may raise output if US supply disruptions deepen: Rystad Energy
West Texas Intermediate futures are down 6% this week, touching an almost two-year low of US$65.21 ($87.35) a barrel.
The timing of the announcement by the Organization of the Petroleum Exporting Countries and its allies seemed unlikely to be a coincidence, and group delegates and crude traders alike speculated that Riyadh deliberately sought to maximize the bearish effect.
“Today’s move appears to be more of a controlled sweating,” said Helima Croft, head of commodity strategy at RBC Capital and a former CIA analyst. “A desire by the OPEC leadership to send a warning signal to Kazakhstan, Iraq, and even Russia about the cost of continued overproduction underlies the decision.”
See also: Wall Street braces for oil in US$60s range on tariff, OPEC+ risks
Astana has infuriated Riyadh by ramping up output at a new project to expand its giant Tengiz oil field, in partnership with international majors like Chevron Corp. Even as the country pledged to conform better with its OPEC+ limits, in February its output was a hefty 300,000 barrels a day above target.
Iraq, another habitual quota cheat, has reduced output closer in line with its quota in recent months, but has shown little sign of making the compensation cuts it promised to atone for past over-production.
While delegates said they were surprised at the outcome of what was supposed to be a routine conference call, they were supportive of measures to end cheating and everyone backed the proposal from Saudi Arabia and Russia to make a larger supply hike in May.
“This is about coaxing Kazakhstan and Iraq to improve their compliance in a balanced way,” said Bob McNally, president and founder of Rapidan Energy Advisers LLC and a former White House energy official.
External pressure
Other analysts speculated that the Saudis and Russia are seeking to remain in the good graces of the US president, who has urged the cartel to “cut the price of oil.” Washington and Riyadh held discussions in the days before the OPEC+ announcement, according to a person familiar with the matter who asked not to be identified.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
“One thing I like is interest rates going down, like groceries going down,” Trump told reporters on Air Force One on Thursday. “And very importantly, the gasoline prices are going down.”
Additional crude from OPEC+ may also help Trump in his pledge to choke off oil exports from Iran, Riyadh’s regional nemesis. His administration has promised to renew its “maximum pressure” campaign to rein in Tehran’s nuclear programme and squeeze the Islamic Republic’s exports by 90% to a mere 100,000 barrels a day.
The surprise OPEC+ hike “is to replace barrels lost from tighter US sanctions on Iran,” Henning Gloystein, head of energy and climate at consultants Eurasia Group.
This week’s events represent a marked contrast with the typical modus operandi of the Saudi Energy Minister. Prince Abdulaziz has regularly urged fellow members to take utmost caution when adding supplies. That conservatism was on display in the two-year supply road map finally approved last month by OPEC+, which the group had delayed several times for fear of capsizing global supplies.
That blueprint stipulated that production halted since 2022 should be restarted in careful monthly slivers of just 138,000 barrels a day that could be “paused or reversed” depending on market conditions, which as of Thursday morning were looking particularly unfavorable after Trump’s tariff announcement.
Given the financial pressures facing OPEC+ producers, it seemed unlikely they would rock the boat. Saudi Arabia needs oil prices above US$90 a barrel to cover government spending, according to the International Monetary Fund, and has been forced to cut spending on some flagship projects key to the transformation plans of Crown Prince Mohammed bin Salman.
Yet the Saudi minister has also demonstrated a willingness to move aggressively when he believes other OPEC+ members aren’t pulling their weight. Just over five years ago, in the opening stages of the Covid-19 pandemic, Prince Abdulaziz instigated a devastating price war with Russia, surging production to more than 11 million barrels a day to compel Moscow to agree to massive production cuts.
His strategy worked and the organization soon agreed to slash almost 10 million barrels a day from its output, leading to a rapid rebound in crude prices.
There may be more price pain to come when the extra OPEC+ oil starts hitting the market. Even before Trump’s tariff onslaught, the International Energy Agency in Paris was forecasting a global surplus of 600,000 barrels a day, as demand growth in China cools and supply from across the Americas swells. Citigroup Inc. and JPMorgan Chase & Co. were predicting that crude would ultimately sink toward US$60.
“On the heels of oil demand that is almost stagnating this year now comes the prospect of even more abundant supplies,” said Norbert Ruecker, head of economics at Julius Baer & Co. Ltd.
