What is Opec+ up to?

Good morning, and welcome back to Energy Source, coming to you from London.

Today we are going to unpack what has been going on within the cloistered ranks of the Organisation of the Petroleum Exporting Countries, better known as Opec. After three years of cutting output to support prices, the producer group has thrown in the towel and appears to be racing to bring back supply.

On Saturday, eight members of the group, including Saudi Arabia and Russia, said they would increase headline production in July by a combined 411,000 barrels a day for the third consecutive month. With oil prices languishing around $65 a barrel, we ask what is Opec+ doing, why now and what next?

Thanks for reading — Tom

What game is Opec+ playing?

To unpack what is driving the change in strategy let’s first review how much oil Opec+ is pumping today and how much supply it is holding back.

The group is producing about 41mn barrels of oil per day, according to Opec’s own data, representing about 40 per cent of global supply. That includes roughly 27mn b/d from Opec’s core 12 members, led by Saudi Arabia, and about 14mn b/d from the 10 allied members, led by Russia.

In total, the 22 members of the combined Opec+ group has more than 5mn b/d of further production capacity that has been idled through a series of production cuts put in place since 2022 to prop up prices. Those measures are best understood as three different sets of cuts:

A group-wide cut of 2mn b/d, announced in October 2022, that applies to all 22 members and is scheduled to last until the end of 2026.

A voluntary cut of 1.65mn b/d, announced in April 2023, by eight members — Saudi Arabia, Iraq, Kuwait, Kazakhstan, Oman, Algeria, Russia and the UAE — also scheduled to remain in place until the end of 2026.

An extra voluntary cut of 2.2mn b/d by the same eight members, formalised in November 2023, that is currently being unwound.

The cuts were initially effective. Brent crude prices averaged $101/b in 2022 and $82/b in 2023. But over time the impact of the curbs has waned — in April Brent averaged $68/b — meaning the cartel was selling less oil but no longer capturing the benefit of higher prices.

The situation has been particularly frustrating for Saudi Arabia, which shouldered the biggest portion of the cuts, trimming its own production by 2mn b/d to under 9mn b/d, the lowest level since 2011, outside of the coronavirus pandemic.

The Financial Times reported in September that Saudi Arabia was finally ready to abandon the strategy and begin bringing back idled supply even if it led to a period of lower prices. Ultimately, it took Opec+ another six months to pull the trigger. But since March, when it announced a plan to unwind the 2.2mn b/d voluntary cut over 18 months, the eight members have moved much faster than expected.

The group increased its headline production target by 137,000 b/d in April, but then tripled the increase planned for May to 411,000 b/d and has since done the same for June and July. Many market watchers — such as Morgan Stanley, Bernstein and Rystad — now believe the group will continue to unwind the cuts at the current rate, restoring all 2.2mn b/d in curbed output by the end of September 2025, a year ahead of schedule.

Why now?

Traders and analysts highlight a variety of reasons for the shift in Opec+ strategy, with opinion split over which have been of greatest importance. They include:

Increased non-Opec supply and tepid demand growth mean the cuts were no longer working. While curbing output by 1mn b/d could boost prices by $8 to $10/b in 2023 and 2024, that benefit was due to fall to about $4/b in 2025 and 2026, according to models developed Natasha Kaneva, head of global commodities research at JPMorgan. In that landscape it no longer made sense for Opec+, and particularly Saudi Arabia, to give up market share.

Several members of the cartel were overproducing, further undermining the impact of the cuts. This has been a particular bugbear for Saudi energy minister Abdulaziz bin Salman, who has railed against the “cheaters”, such as Kazakhstan, and is insistent that cuts need to be equitable.

Donald Trump wants low oil prices. The US president has repeatedly called for Opec+ to pump more, and doing so will have won the group, particularly Saudi Arabia and UAE, some political favour.

Lower prices will hurt US shale producers, some of which require prices of $65/b to break-even. Pumping more therefore allows Opec+ to give Trump what he says he wants, while, ironically, also hurting the US industry.

Demand is stronger than most people think (according to Opec+). In its statement on Saturday, the group pointed to “healthy market fundamentals, as reflected in the low oil inventories”. Seasonal demand is indeed strong, particularly in the Gulf, with refineries coming out of maintenance, and OECD inventories are below their five-year average. However, as Bernstein pointed out in a note yesterday, that average is skewed by the pandemic and “does not automatically mean a healthy oil market”.

How has the market reacted?

In general, the decision to fast-track the return of idled production has weighed on the oil price since April. However, after Saturday’s confirmation of another 411,000 b/d increase in July, prices for Brent crude actually rose 3 per cent on Monday. Opec+ had been expected to continue with the accelerated increases, meaning the announcement did not surprise and some traders had feared an even bigger increase.

The longer-term implication of the announcement, however, is that the eight Opec+ members will probably have unwound the full 2.2mn b/d by the end of September, leading to a potential surplus in global oil supply in the final quarter of the year.

Given that many of the eight members are already overproducing their quotas the actual increase in group output is likely to be lower than the headline figure. Morgan Stanley expects Opec+ supply to increase by 200,000-260,000 b/d in June and July, and about 50,000 b/d in August and September.

Nevertheless, the increases mean global supply will outstrip demand by 800,000 b/d in the fourth quarter and by 1.5mn-2mn b/d in the first half of 2026, the bank estimates, and push Brent prices down into the mid-$50s. “With Opec+ showing little sign that the quota increases will slow, this prospect remains firmly in-place,” it said.

What next?

A lack of clear communication from Opec+ is making it more difficult than in the past to guess the group’s endgame and predict what comes next, traders and analysts say.

While the group previously held twice yearly in-person meetings at its headquarters in Vienna and accompanied big decisions with press conferences, it has only held two such meetings since 2020. Instead, Opec ministers now generally meet over video call and press conferences have become vanishingly rare.

As a result, it is clear that Saudi Arabia wants to restore its idled production but unclear whether the objective is “to regain market share, hurt US shale, please Trump, or all of the above”, one longtime Opec watcher said.

One unknown is what happens after the group finishes unwinding the first tranche of cuts in September. “Our real concern at this stage is what happens next,” Irene Himona, head of oil and gas at Bernstein, said in a note. “There is clearly a possibility/risk that Opec+ will then start unwinding faster the second set of voluntary cuts of 1.6mn b/d.”

Uncertainty also hangs over group unity, following a difficult period in which several members, in particular Kazakhstan, have pumped above their quotas and shown little sign of toeing the line.

“There is no denying that Kazakhstan has emerged as something of an unstable element within Opec+ this year,” said Helima Croft, head of global commodity research at RBC Capital Markets.

Kazakh deputy energy minister Alibek Zhamauov told Opec last week that his country would not curtail production, according to a statement published by the Russian news agency Interfax. The country depends on international oil companies, including Chevron, to produce more than 70 per cent of its oil and has exhibited no desire to ask them to curtail output.

Angola, which has a similar oil sector dominated by international companies, left Opec at the end of 2023. Kazakhstan’s dependence on Russia means it is less likely to take a unilateral decision to leave but the tensions with the rest of the cartel are unlikely to suddenly fade. (Tom Wilson)

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Energy Source is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.