OPEC+ countries have undertaken a new, draconian course of action to increase oil production since May above their previously agreed upon plans. At least eight of those member countries have already taken steps to join them. This cast of characters encompasses both OPEC and non-OPEC producers, such as Russia. Saudi Arabia and Russia are the primary architects of this effort. They are laying that groundwork while artfully dancing through a rapidly unfolding landscape of market forces and geopolitical winds.
Since May, the OPEC+ coalition has increased its production. This sudden increase in oil supply has added substantial downward pressure on global oil prices. We believe this decision has far-reaching implications. It’s a demonstration that both Saudi Arabia and Russia are committed to balancing their long-term market share with striking a firm deal to their OPEC+ allies who continue to over-produce.
Only eight countries have increased their production enough to compensate. Of course, these three major players within the OPEC+ framework are all institutionally motivated to capitalize on the most favorable market conditions since 2014. Even in the face of a clear depressing effect on production, these countries have decided to focus on producing more output. This decision therefore marks their commitment to staunchly reclaiming market share. They hope to recapture territory that they claim has been lost to non-OPEC producers in recent years.
The top leaders from Saudi Arabia and Russia have made their plans extremely clear as to what they aim to achieve with this output increase. They have taken this as a signal and opportunity to pursue a savvy competitive strategy to ramp up their own production. Further, they want to reassert control of the oil market. They intend to reduce the benefits other producers would enjoy by raising production. Simultaneously, they want to penalize fellow allies who have deviated from the output quota they have all agreed upon.
The consequences of this approach are sending waves through the global oil market. Some analysts have noted that OPEC+ production has been increasing, which would lead to more revenue for these countries. They caution that this uplift could lead to sustained volatility in the longer run if prices continue to collapse. The coalition took a courageous stand, one with clear political risk. Leaders are right now balancing the new realities of today’s market conditions with the need to price sustainably.