The decision may also reflect geopolitics. Many commentators noted the production increase could have been aimed at pleasing Washington ahead of President Trump’s visit to the Gulf. Increasing oil supply may be intended to show responsiveness to US administration concerns over high energy prices. Furthermore, lower oil prices could increase pressure on Russia to start talks to end the war in Ukraine.
Saudi Arabia’s new strategy is also targeting those OPEC+ members that have repeatedly breached their output quotas. Compliance has become a growing source of friction within the cartel. Kazakhstan, Iraq and the UAE have consistently produced above their agreed limits. By raising overall output, OPEC+ is sending a signal that it expects adherence to the new limits and is prepared to impose de facto penalties on non-compliant members.
However, not all agreed quota increases will result in greater OPEC+ oil supply. If the three overproducing countries respected their quotas, by September OPEC+ oil supply could be only 1.2 mbd higher than in March.
Economic implications of the OPEC+ strategy
If non-OPEC+ supply remains unchanged, the OPEC+ pivot will lead to an oil supply glut in the rest of 2025 and in 2026. According to the International Energy Agency (IEA) May Oil Market Report, oversupply was large in Q1 2025 and the amount of OPEC supply needed to balance demand will fall for several quarters reflecting moderate demand and rising supply from other producers.
Unsurprisingly, oil prices have fallen to a four-year low and downward pressure seems likely to continue, something that is likely to result in an eventual rebalancing of the oil market. Consider, for example, the US shale producers: according to the latest Kansas City Fed Energy Survey they need a WTI oil price of USD 65 per barrel (pb) to profitably drill a new well. If oil prices stabilised around USD 55 pb they would likely reduce supply.
This suggests that WTI oil prices much lower than USD 60 pb are unlikely to last. As a result, the global disinflationary shock stemming from the OPEC+ pivot will likely peak in the second half of 2025 and will likely unwind next year.