OPEC+ Boosts Production by 54.8 Million Barrels, Driving Oil Prices Down 11%

OPEC+ has initiated a new round of supply shock, which may exacerbate the risk of global oil oversupply, putting further downward pressure on oil prices. This move aligns with the calls to lower fuel costs, benefiting consumers but posing challenges to the profitability of oil producers worldwide, including those in the United States and OPEC member countries.

On July 5, eight major member countries of OPEC+, led by Saudi Arabia, agreed during an online meeting to increase production by 54.8 million barrels per day in August, exceeding market expectations of 41.1 million barrels per day. This potential increase in production reflects a significant shift in OPEC+'s policy direction this year, marking an acceleration in the organization's aggressive strategy to regain market share.

On July 7, it was reported that the OPEC+ online video conference made this surprising decision in just 10 minutes. The Saudi Energy Minister pushed for this acceleration in production, reflecting the country's urgency to restart more idle capacity.

Analysts believe that OPEC's production decision will help meet the calls to lower fuel costs, benefiting consumers. However, it will present profitability challenges for global oil producers, from the U.S. shale oil regions to OPEC member countries.

Brent crude futures have fallen 11% in the past two weeks, quickly shaking off the impact of the Iran conflict. Goldman Sachs and JPMorgan Chase have consistently predicted that oil prices will fall further to $60 per barrel this year as Trump's trade tariffs cast a shadow over the global economy, impacting oil demand.

This production increase involves Saudi Arabia, Russia, the United Arab Emirates, Kuwait, Oman, Iraq, Kazakhstan, and Algeria. The 54.8 million barrels per day increase in August is significantly higher than the previous increases of 41.1 million barrels per day in May, June, and July.

The alliance stated that it would consider another increase of 54.8 million barrels per day in September during its meeting on August 3. If this plan is implemented, OPEC+ will complete the withdrawal of the 2.2 million barrels per day reduction, originally scheduled for 2023, a year earlier than planned.

By July, the eight member countries participating in the production increase had announced or implemented a total production increase of 1.37 million barrels per day, accounting for 62% of the 2.2 million barrels per day reduction they are currently withdrawing.

OPEC+ is accelerating production in response to growing supply competition from the United States and other oil-producing countries. The organization is seeking to expand its market share in this competitive environment.

Additionally, the acceleration in production is partly due to some OPEC+ member countries exceeding their quota limits. Reports indicate that countries like Kazakhstan have significantly exceeded their targets, causing dissatisfaction among other member countries that strictly adhere to the production cut agreement.

Despite concerns about oversupply, Saudi Arabia has shown confidence in demand. Saudi Aramco has set the official selling price for Arab Light crude oil to Asia in August at a premium of $2.20 per barrel over the Oman/Dubai average, up from the previous $1.20 per barrel.

OPEC+ officials cited summer demand as one reason for Saudi Arabia's optimism. Oil inventories at the key storage center in Cushing, Oklahoma, are declining, and the price differential structure does not indicate current oversupply. U.S. diesel inventories have also fallen sharply.

However, other forecasting agencies have taken a cautious stance. The International Energy Agency, based in Paris, predicted before the production increase that there would be an oversupply equivalent to about 1.5% of global consumption in the fourth quarter.

Further declines in oil prices could alleviate the repeated calls to lower fuel costs to curb the cost-of-living crisis. However, falling prices will impact the U.S. oil industry, affecting companies from giants like ExxonMobil to shale oil explorers who broadly support the return of the Trump administration.

Shale oil executives in a recent survey indicated that they expect the number of rigs this year to be significantly lower than initially planned for early 2025 due to falling oil prices. For OPEC+ member countries, low oil prices also pose fiscal pressures.

According to the International Monetary Fund, Saudi Arabia needs oil prices to exceed $90 per barrel to cover government spending and support Crown Prince Mohammed bin Salman's plans to stimulate the country's economy. Additionally, Saudi Arabia is facing a rapidly rising budget deficit and has been forced to cut spending on some of the Crown Prince's flagship projects. An independent analyst and former head of the oil markets and industrial department at the International Energy Agency stated, "They (Saudi Arabia) do have the option to make a 180-degree turn. But at the same time, apart from ensuring market share and accepting lower prices, there is no other choice. You might as well accept the reality of the world, and this is exactly what they are doing."