Major oil producers on Sunday said they’ll start to unwind even more of their previous production cuts — suggesting they’d rather fight for market share than defend prices. That could exacerbate expectations for a global glut in the crude market and hurt price-sensitive U.S. shale producers.
On Sunday, eight members of OPEC+ — comprised of the Organization of the Petroleum Exporting Countries and its allies — agreed to gradually start reinstating production of 1.65 million barrels per day that they had cut back in April 2023. The unwind will start with an output increase of 137,000 barrels per day in October.
Saudi Arabia and its allies, which include Russia, “signaled a decisive pivot: defending market share now outweighs defending prices,” said Claudio Galimberti, chief economist at Rystad Energy.
“The headline volume may look marginal, but the messaging is not,” he said in commentary Monday. “By allowing supply back into a market moving toward surplus, OPEC+ is playing offense, not defense. Traders have been put on notice.”
The production increases look to feed expectations for a global oversupply of crude this year and next. In its latest monthly report, the International Energy Agency forecast that 2025 world oil demand will come in at 103.7 million barrels per day and supply at 105.5 million bpd. For 2026, it forecast demand at 104.4 million bpd and supply at 107.4 million bpd.
Output limits
Even so, some analysts pointed out that the decision by OPEC+ actually makes sense despite those forecasts for an oversupply, and following the group’s first round of 2.2 million bpd in production increases from April to September of this year.
Crude exports from OPEC+ have actually been low relative to the headline increase of 2.2 million bpd over the six-month period through September, strategists at Societe Generale wrote in Monday note. They pointed out an Energy Aspects estimate that production has only climbed by 1 million bpd from March.
The expansion in production so far this year may have also deterred “some upstream investment in non-OPEC+ countries, including the U.S. shale patch,” and increased market share for producers that have the ability to raise output, while removing the “perceptions of plentiful spare [output] capacity that has kept a lid on upward moves in oil prices in recent years,” they wrote.
OPEC+’s decision to boost production even further can also enable the group to “properly assess true spare capacity among the members,” the strategists at Societe Generale said. As restrictions are lifted, if countries do not raise output or fully utilize their new quotas, that could lead to the “implementation of very realistic baselines for the countries from 2026 and beyond.” The latest OPEC+ move will “provide some clarity on the true state of spare capacity,” they added.
Limits to spare production capacity among OPEC+ may be a key reason why the actual output increase in October may be less than half of what was announced, said Michael Lynch, president of Strategic Energy & Economic Research.
With that in mind, traders pulled oil prices a bit higher Monday, with U.S. benchmark West Texas Intermediate crude’s October contract climbing 0.6% to settle at $62.26 a barrel on the New York Mercantile Exchange, after posting a loss last week. Global benchmark Brent crude for November delivery tacked on 0.5% to end at $66.02 on ICE Futures Europe.
“There is little spare capacity left in OPEC+,” Lynch told MarketWatch. “Bulls are insistent that this will be driving the market the next few quarters.”
That said, the oil producer within OPEC+ with the most spare production capacity would likely benefit the most from any boost in global market share. Within OPEC+, Saudi Arabia leads the pack.
The IEA pegged Saudi Arabia’s July oil production at 9.52 million bpd, with sustainable capacity at 12.1 million bpd — meaning that this level can be reached within 90 days and sustained for an extended period. That leaves the Saudis with about 2.6 million bpd in spare capacity.
Supply-glut forecasts
Still, OPEC+’s latest decision to boost output is “difficult to reconcile, as we see the oil market standing on the precipice of bruising oversupply,” wrote strategists at Macquarie in a Sunday note.
OPEC+’s move feels a bit like a game of “chicken,” they said. “Coupled with non-OPEC growth, perhaps OPEC has resolved to power ahead and not be the first to ‘swerve’ by pausing increases” in production. Swerving along the oil supply path, they added, would then be reserved for more “price-sensitive producers,” particularly U.S. shale.
Strategic Energy & Economic Research’s Lynch, however, said that for now, U.S. shale producers are likely to stand by to see how much oil actually reaches the market, and whether it depresses prices or not.
“Market share is much less of a concern than profitability” when it comes to the shale producers, he said. “Unless prices rise significantly, they are going to invest and drill less, possibly leading to lower production levels.”
Source: MarketWatch