Over a barrel
How Saudi Arabia is cranking up the pressure on its OPEC allies
Will oil prices fall much further?
YOU cannot fault the Organisation of the Petroleum Exporting Countries for its communication.
On May 3rd it and its allies (OPEC+), which supply 40% of the world’s crude oil, announced that they would crank up output by 411,000 barrels a day (b/d) in June—triple what analysts had expected, and equivalent to 0.4% of global demand.
Global prices briefly sank below $60 a barrel, nearing four-year lows; they remain 6% below their level of April 28th, when rumours of a supply boost first emerged.
In a statement, the group gave a straightforward reason for its decision: “healthy market fundamentals”.
The problem is that nobody believes it.
Recent trade tensions have prompted the International Energy Agency (IEA) to reduce its global demand forecast for the rest of 2025 by 400,000 b/d.
What growth in appetite survives is expected to be met through higher output by exporters outside the cartel, such as America and Guyana.
Even before May 3rd, prices had slid by a quarter since mid-January.
What really explains the cartel’s kamikaze decision?
Until recently OPEC+ was showing restraint.
Strict quotas, cutting the group’s production by nearly 6m b/d, were introduced in an attempt to keep prices high.
Then, in December, OPEC+ confirmed its intention to undo some of the cuts by a modest 122,000 b/d each month, starting in April.
Last month, however, the cartel snapped, declaring it would instead raise output in May by a huge 411,000 b/d—a decision it repeated this month.
The cartel can tolerate low volumes if prices are high, or high volumes if prices are low.
But low volumes at low prices cannot be seen as a success.
At the same time, the group believes demand is less elastic to price: although a 1m b/d cut in OPEC+ supply triggered global price jumps of $20 a barrel in 2022 and $10 in 2023, JPMorgan Chase, a bank, estimates such a reduction would lift prices by just $4 today.
As such, the cartel thinks it can raise production without whacking prices.
The less obvious reason for the switch is that Saudi Arabia, the group’s leader, wants to punish other members.
Iraq, Kazakhstan and the United Arab Emirates, in particular, have overshot their production quotas for months (see chart).
They have promised additional cuts in future but Saudi Arabia is tired of waiting.
It is betting it can cope better with price slumps; unlike Iraq and Kazakhstan, it has a huge sovereign fund and easy access to bond markets.
Jorge León, a former OPEC analyst, reckons that the pain will continue until the troublemakers reform their ways.
It is a risky gamble for Saudi Arabia, which is part-way through an expensive reform plan.
So far prices have not fallen too far, in part because the market expects a summer rise in demand.
But it will droop in autumn as refineries enter maintenance season.
Another few supply increases, together with a signal that more will follow, and global prices could sink below $50.
That might jeopardise shale-oil production in America, a powerful ally run by a bad-tempered president.
It would also worsen fiscal headaches in Russia, making it harder for the OPEC+ member to fund its war.
They are not in a rush.
On April 23rd Erlan Akkenzhenov, Kazakhstan’s energy minister, announced the country would prioritise its interests over those of the cartel when deciding on production levels.
Even if its priorities change, how much Kazakhstan produces is not entirely up to the government, since the country is one of the few OPEC+ members where international oil companies, rather than a state monopoly, dominate production.
Saudi Arabia’s game of chicken is just getting started.
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