OPEC+ decision to raise production likely to have limited impact

The seven OPEC+ countries, which previously announced additional voluntary adjustments in April and November 2023, namely Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Algeria, and Oman, have agreed to increase production by 188,000 bpd from July

However, the impact of this increased production quota is likely to be limited, according to Jorge Leon, head of geopolitical analysis at Rystad Energy

“With the Strait of Hormuz closed, the issue is not whether OPEC+ raises paper quotas, but whether additional barrels can actually reach the market,” he said.

“OPEC+’s decision to continue increasing production by 188,000 barrels per day confirms that the group remains on track to unwind the first tranche of voluntary cuts by September, if not earlier. But in the current market, the physical impact of such a decision would be close to zero.”

Leon noted that not only is the Gulf facing oil export obstacles, Russia is also under pressure as a result of intensifying drone attacks on its oil infrastructure.

“The latest increase will likely expose a widening gap between OPEC+ targets and Russia’s actual production capacity,” he said.

“The more important question is what happens after the first tranche of voluntary cuts has been fully unwound. The capacity assessment currently undergoing should serve as the basis for 2027 quotas, but with the Strait of Hormuz closed and several producers operating far below normal levels, it will be very difficult to accurately assess each country’s sustainable production capacity. That makes the next quota reset much more politically sensitive.”

Once the Strait of Hormuz reopens and flows gradually recover, the market could face a very large surplus, he pointed out, driven by returning OPEC+ supply, stronger US shale output and weaker demand after a period of very high oil prices. The UAE, now free from its OPEC quotas, would also likely ramp up production.

Once restocking concludes, OPEC+ may be forced to implement cuts again.

“That is when cohesion will become the central issue. OPEC+ cohesion is easy to maintain when the market does the discipline for you. The real test is whether that holds when the barrels come back, stocks rebuild and members have to decide who cuts.”

At the moment though, the reopening of the Strait of Hormuz seems a distant prospect, given the resumption of hostilities between Israel and Iran, which has caused the oil price to spike again.

“Despite ongoing diplomatic efforts, markets remain concerned that even a peace agreement would not immediately restore normal energy flows due to damaged infrastructure, mined waterways, and production outages,” commented MUFG Bank, echoing other industry analysts. “The renewed escalation has reinforced fears of prolonged supply disruptions, keeping upward pressure on oil prices despite OPEC+ plans to gradually increase output.”