OPEC+ (group of 11 observing countries, with participation in the organization of oil exporting countries, but without voting rights – Brazil among them) approved a new increase in oil production, totaling three consecutive months of discharge, despite the resistance of members such as Russia and Oman.
The decision, led by Saudi Arabia, represents a radical change in strategy, which now bets on the drop in prices to recover market share and press countries that have been breaking production goals.
Saudi Arabia -led oil -producing nations agreed, in a video conferencing on Saturday, add 411,000 barrels a day to the market in July, according to a statement published on the group’s website. The increase follows identical volume elevations scheduled for May and June, and symbolizes a significant turn in group posture – to protect the barrel value to force its devaluation.
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“OPEC+ is no longer whispering,” said Jorge Leon, an analyst at Rystad Energy A/S and former Opep Secretariat employee. “May gave a tip, June spoke clearly, and July came with a megaphone.”
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Authorities claim that the increases reflect Saudi Arabia’s desire to punish members who have exceeded their quotas, such as Kazakhstan and Iraq, recover lost market share for rival producers such as the United States shale, and pleasing US President Donald Trump, who seeks lower fuel prices.
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Although there was a final consensus for the July increase, some members expressed resistance. Russia, Algeria, and Oman defended a break in production increases, delegates said on condition of anonymity, as the information is private.
The differences between Russia and Saudi Arabia – the two most influential members of the cartel – will return to July 6, when they will discuss production levels for August.
Oil has fallen to a minimum of four years, below $ 60 per barrel in April, after OPEC and its allies announced that it would increase production three times more than expected, even with the demand already weakened by Trump’s trade war.
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The market can interpret Saturday’s deal as slightly positive, as “there were concerns about even greater increase,” said Giovanni Staunovo, UBS Group Ag commodity analyst.
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Financial risk
The strategy change did not come at no cost to OPEC+. Although the fall in oil brings relief to consumers and central banks facing persistent inflation, it poses financial risk to OPEC+ oil producers and other parts of the world.
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While future Brent oil contracts are close to $ 64 per barrel, the International Monetary Fund (IMF) estimates that Saudi Arabia needs prices above $ 90 to support the ambitious spending plans of Crown Prince Mohammed bin Salman. The kingdom faces a growing budget deficit and was forced to cut investments in iconic projects such as Neom’s futuristic city.
The deceleration also affects the heart of schist oil in the US, where companies like Diamondback Energy say that production has already reached peak – despite Trump’s promise of a new age of growth with the motto “drilling, drilling, drilling”.
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If Saudi Arabia’s strategy is to discipline countries that do not fulfill their quotas through a “controlled punishment”, it does not seem to be working.
Kazakhstan, the most blatant offender, continues to exceed its limit in several hundred thousand barrels a day and has publicly stated that it does not intend to correct the excess. Energy Minister Yerlan Akkenzhenov told reporters on Thursday that the country cannot impose reductions on international corporate partners or reduce the production of state fields.
For some analysts, supply increases are totally justifiable. Demand is expected to grow in the coming months in the US with summer trips and also in the Middle East, where the maximum use of air conditioning causes part of the barrels to be consumed internally.
“The fundamentals are currently strong – the stocks are very low,” said Amrita Sen, director of research at consulting firm Energy Aspects, in an interview with Bloomberg before the meeting. “It’s a good time for OPEC+ add barrels to the market, so I don’t see why they won’t do it.”
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Even so, new price falls may be on their way. JPMorgan Chase & Amp; Co. foresees that Brent’s future contracts fall to the $ 50 range this year, as the cartel increases contribute to a global surplus of more than 2 million barrels per day.
With the expected increase in July, OPEC+ will be just ahead of half the path of its plan to reactivate 2.2 million barrels per day of production that has been paralyzed in recent years – a process initially scheduled to last until the end of 2026. The group will decide in the coming months with which it will quickly restore the remaining supply still retained.
