OPEC+ Boosts Oil Supply by 100 Million Barrels Daily, Risking Price War

The OPEC+ alliance has recently announced a significant increase in oil supply, which is expected to exacerbate the global oil surplus in the second half of this year. This move comes in response to calls from the U.S. President to lower fuel prices, but it also poses a challenge for oil-producing nations as it puts downward pressure on prices. The decision to boost production by 100 million barrels per day, effective from August, is a strategic response to the current market dynamics. The alliance aims to stabilize prices and prevent a potential oversupply crisis, but the increased output could lead to a price war among producers. The market is closely watching how this decision will impact global oil prices and the broader energy sector.

The OPEC+ alliance's decision to increase oil supply is a significant development in the global energy market. The move is expected to have far-reaching implications for oil-producing nations, as well as for consumers and the broader economy. The increased supply is likely to put downward pressure on oil prices, which could benefit consumers but pose challenges for oil-producing nations. The decision to boost production is a strategic response to the current market dynamics, as the alliance aims to stabilize prices and prevent a potential oversupply crisis. However, the increased output could also lead to a price war among producers, as each nation seeks to maintain its market share. The market is closely watching how this decision will impact global oil prices and the broader energy sector.

Despite the potential risks, the alliance appears confident in its decision. Saudi Arabia, the leading member of the alliance, immediately raised oil prices following the announcement, indicating a strong belief in the market's ability to absorb the additional supply. However, the global oil market was already on thin ice before this decision, with signs of oversupply becoming increasingly apparent. Analysts warn that while the market may be able to digest the extra supply in the short term, ongoing trade tensions and other risks could lead to a more significant imbalance in the coming months, putting further downward pressure on oil prices.

The decision to increase production was made during a brief video conference, catching energy traders off guard. While the move is seen as a positive for consumers and fulfills a campaign promise to lower fuel costs, it could also cause pain for producers, from U.S. shale oil regions to OPEC member countries. Saudi Arabia, however, seems unfazed. The following day, Saudi Aramco raised its flagship crude oil premiums for key Asian markets to levels exceeding trader expectations, suggesting a lack of concern about demand.

Officials from the alliance cited summer demand as a reason for their optimism. Key oil storage facilities in the U.S., such as Cushing, have seen a continuous decline in inventories, and the price structure does not indicate an oversupply. Additionally, U.S. diesel stocks have sharply declined. The shift in supply dynamics comes as the Northern Hemisphere's summer fuel demand peaks, providing a strategic window for the alliance to regain market share lost to competitors like U.S. shale oil producers in recent years. However, this decision will alter the global supply landscape. While OPEC predicts that the new production will meet demand until December, other institutions are skeptical. The International Energy Agency had already forecasted a global oil surplus of 1.5% of consumption for the fourth quarter before the production increase was announced.

Over the past two weeks, London oil prices have plummeted by 11%, with a muted market reaction to tensions in the Middle East, indicating that traders do not see an urgent need for increased production. Goldman Sachs and JPMorgan Chase predict that oil prices could fall further to 60 dollars per barrel this year due to weak consumption in major Asian economies and the impact of U.S. trade tariffs on the global economy. The decision to increase production was supported by eight core member countries during the video conference. In August, the alliance plans to restore 54.8 million barrels per day of halted production, a significant increase from the 41.1 million barrels per day increase in May-July. This is three times the original target for the previous three months. The alliance will discuss further increasing production by 54.8 million barrels per day in September during a meeting on August 3. If implemented, this would accelerate the recovery of the 2.2 million barrels per day reduction planned for 2023 by a year.

However, the actual impact on supply may be less than expected, as Saudi Arabia's energy minister is pressuring countries that have exceeded their quotas to reduce their production. Russia and Iraq have shown signs of compensation, but Kazakhstan continues to produce beyond its quota. The official increase in production is one thing, but the actual new supply is another. Diesel premiums indicate that the market is still in short supply. Unless there is visible growth in inventories, there is no clear path for oil prices to decline. Officials also emphasized that the production increase plan can be "paused or reversed based on market changes." However, unless this option is activated, the approved production increase is almost certain to exacerbate the price decline. This could alleviate the U.S. President's repeated calls to lower oil prices to curb the cost-of-living crisis. While implementing a series of tariff measures and pressuring the Federal Reserve to cut interest rates, the U.S. President also faces inflationary pressures. However, a price collapse would severely impact the U.S. oil industry, from giants like ExxonMobil to shale oil companies that strongly supported the U.S. President's campaign. The latest survey shows that due to weak oil prices, shale oil company executives expect the number of wells drilled in 2025 to be significantly lower than initially planned at the beginning of the year. This crisis could also affect the OPEC+ alliance. The International Monetary Fund points out that Saudi Crown Prince Mohammed bin Salman's economic transformation plan requires oil prices to remain above 90 dollars per barrel. Facing a widening fiscal deficit, Riyadh has been forced to cut spending on some flagship projects. If fiscal pressures persist, Saudi Arabia may choose to cut supply again. An independent analyst and former head of the oil market and industry department of the International Energy Agency stated, "They do have the option to make a policy U-turn. But at this stage, other than maintaining market share and accepting lower oil prices, there is no other choice. What they are doing is facing reality and going with the flow."