By ripping off the band-aid, the Saudis seem to have accepted that letting prices weaken for a period of time is a necessary part of regaining their lost market share.
On April 3, OPEC+ surprised the market by raising its headline production targets by 411,000 bpd for May, which was quite a bit more than the 135,000 bpd which was expected as part of a gradual unwinding of longstanding production cuts. It essentially added two additional months’ worth of planned increases, frontloading it into May.
The core participants in OPEC+ have long wanted to start increasing output and taking back the market share they have given up, after U.S. and other non-OPEC production filled in the volume needed to accommodate rather tepid demand growth. This made itdifficult for them to reverse the cuts without driving prices down.
One irony of this is the timing. Prior to the announcement on April 3, Brent crude oil already had plummeted four percent on the news of the new U.S. tariffs announced by President Trump the previous day after the market close, before getting hammered down an extra two percent by the news from OPEC+. The other irony is that OPEC+ still has not reversed the deep cuts it made in 2020 during the pandemic, or the significant extra unilateral cut Saudi Arabia delivered in 2023. Normally, the start of an economic slowdown would be when OPEC+ would be looking at output restraint, not adding volumes, but it has become increasingly clear that that strategy has run its course.
The only thing which is going to allow OPEC+ to start selling more volume is to begin restoring those volumes and letting the chips fall where they may in terms of short-term prices. The fact that they didn’t flinch yesterday shows how clear that idea has become, despite OPEC+ member governments’ reluctance to acknowledge it. Several OPEC+ governments, as well as outside analysts, have spoken of the move as intended in part to pressure those who are currently overproducing their quotas, particularly Kazakhstan, Iraq, and Nigeria, to fall back into line.
The potential threat of Saudi Arabia flooding the market, as it did in the mid-1980s and again briefly in 2020 during the pandemic, is always in the background. But this seems a pretty weak explanation, given that there is no talk of tilting back toward further restraint if the laggards do come back into compliance.
Russia also has fallen below its target, apparently unable to reach it under the impact of sanctions affecting its ability to obtain capital goods for its oil sector. It has, though, suspended operations at two moorings which load tankers for the Caspian Pipeline Consortium (CPC) through the actions of its pipeline regulator. Some have seen this action as putting pressure on Kazakhstan over its overproduction. That suspension appeared to be lifted by a court decision on April 4.
Another relevant piece of context for the decision is that both Saudi Arabia and Russia have reasons to seek to curry favor with President Trump at the moment. The Trump administration also is seeking to drive Iranian oil exports down to near zero, so adding a bit of volume before that potentially takes place would be viewed favorably. It also offsets what will probably be a modest amount of lost volume from Venezuela, now that the Trump administration has revoked Chevron’s license to operate there under sanctions and is levying a punitive tariff on countries which buy Venezuelan oil.
The question now is whether this will all change back toward renewed production cuts if we do see the global economic slowdown financial markets fear could result from Trump’s trade war. I am skeptical of that, unless the pain becomes much worse. The Saudis seem to have accepted that letting prices weaken for a period of time is a necessary part of regaining their lost market share – that keeping three million bpd off the market indefinitely is not their revenue maximizing strategy over the long-term.
Greg Priddy is a Senior Fellow at the Center for the National Interest and does consulting work related to political risk for the energy sector and financial clients. Previously, he was director of global oil at Eurasia Group and worked at the U.S. Department of Energy.
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