OPEC+ agreed to increase crude oil production more than analysts expected, which will increase pressure on quotes

On Saturday, OPEC+ members agreed to increase crude oil production by 548,000 barrels per day in August, although analysts had expected an increase of only 411,000 barrels per day, which would be in line with the level of production increases they approved in May, June and July. This will increase pressure on oil prices this week, especially against the backdrop of a possible new ceasefire agreement between Israel and Hamas.

The OPEC+ group, which produces about half of the world’s oil, has been cutting output since 2022 to support the market, but this year it reversed course to regain market share as US President Trump demanded it increase output to keep gasoline prices low.

Key exporting countries supported this decision, despite the risk of lower oil prices, as many oil-producing countries, including Saudi Arabia, are facing budget deficits. For example, Saudi Arabia needs an oil price of $90/barrel to balance its budget. After the rapid end of the Iran-Israel conflict, such a price became unattainable, so the country is trying to compensate for the losses by increasing sales.

In addition, traditional producers such as Saudi Arabia are seeking to lower prices in order to win the long-term battle with American and Canadian companies that extract more expensive shale oil. If the price drops to $ 60-63 / barrel, the development of many shale deposits will become unprofitable, which will force competitors to reduce drilling and free up market share. The number of production rigs in the US has already fallen to 425 compared to a peak of 627 in December 2022.

Lower prices are beneficial to large importers such as Europe, China, Japan, and Korea. For the US, the situation is ambiguous: on the one hand, low gasoline prices have a positive effect on the government’s ratings, but on the other, they harm American oil companies, which do not always fit into the cost of production at such low prices.

Increasing production quotas negatively affects the Russian Federation from three sides at once, which is extremely beneficial for Ukraine.

1. Price decline. Russian Urals crude is trading at a discount of $11-13/barrel to Brent. A drop in Brent prices below $68/barrel would push Urals prices well below the sanctions ceiling ($60) to $45-50/barrel. This opens the way for a discussion on lowering the price ceiling to $45, as promoted by the EU and Britain.
2. Strengthening control. Increasing the supply of oil on the market reduces the risk of its shortage. This makes it more likely that control over the Russian “shadow fleet” will be tightened and price controls will be more effective.
3. Budgetary problems. The Russian budget is already in a state of crisis: revenues have decreased, while military spending continues to grow. The fall in oil revenues will only exacerbate these problems. The fall and winter promise to be a difficult period for the oil and gas sector and the Russian economy as a whole.

In addition, it becomes practically impossible for the Russian Federation to conduct either new drilling or significantly increase exports.

Israel has agreed to resume talks with Hamas on a ceasefire in Gaza and the release of hostages, and today’s talks between Prime Minister Netanyahu and US President Trump are likely to be decisive in the ceasefire process. Incidentally, a group of five leading sheikhs from the Hebron district of the Palestinian Authority sent a letter to the government expressing their desire to join the Abraham Accords and achieve peace with Israel, which increases pressure on Hamas from the Palestinians themselves.

Tags: prices