Crude Awakening: OPEC+ Turns the Taps Back On

OPEC+ seeks to continue raising oil output despite anticipated weakening global demand in bid for market share over profitability.

A meeting was held on Sunday where OPEC+ (The Organisation of the Petroleum Exporting Countries) members agreed to raise production by 137,000 barrels per day (bpd) for October. 

While this is lower than the preceding monthly increases of 555,000 bpd for August and September, it's a slightly harder increase for OPEC+ to justify.

In the summer months of August and September, oil demand tends to increase, alleviating any downward pressure on price that comes from increased production. 

However, in winter months the opposite is true, making expansions in production such as this much harder to justify.

OPEC+ has cited a ‘steady global economic outlook and currency health market fundamentals’ in its justification for the increase.

These further increases in production are set to benefit two countries in particular, Saudi Arabia and the United Arab Emirates (UAE).

This is because the majority of countries in OPEC+ are already producing at maximum capacity, whereas both Saudi and the UAE have unused oil capacity.

This comes as Saudi Arabia has sought to punish other members such as Kazakhstan for overproducing, which they can now do by taking advantage of other members’ inabilities to scale up production within the group.

On top of this, since the start of the year, Trump has been applying pressure to OPEC+ to increase production in order to fulfill his promise to bring gasoline prices down.

Although, within these calls to ‘drill, baby, drill’ lie contradictions.

US shale companies have reported that they need oil prices to average $65 in order for them to be profitable, whereas the Trump administration has repeatedly cited $50 per barrel as its end goal. 

Furthermore, this signals a changing approach to the oil market from OPEC+, where they have previously leveraged their market share in order to increase oil prices and therefore profitability, they now seem to be inverting the system.

Instead, they are now increasing production, sacrificing profitability in the name of market share.

Jorge Leon, analyst at Rystad said that "The increase is less about volumes and more about signalling – OPEC+ is prioritizing market share even if it risks softer prices"

Although, the group doesn’t appear to be all in on the decision yet, emphasising that ‘it retained options to accelerate, pause or reverse hikes at future meetings’, scheduling the next meeting early into the announced hikes on October 5.