OPEC+ likely to go ahead with unwinding supply: Rystad

US President Donald Trump's tariffs are expected to be short-lived and the best course of action for OPEC+ would be to go ahead with the plan of unwinding supply in the second quarter of the year, according to new research from Rystad Energy

The impact of tariffs is likely to result in crude and product surpluses in Canada and Mexico while driving shortages for both in the US system, sending an overall bullish signal to the market.
Oil prices touched a high of near US$82 per barrel by mid-January on tighter Russian sanctions.

With these tariffs emerging – 25% on Canada and Mexico and 10% on China – prices are expected to stay around the US$75 range, assuming OPEC takes action to maintain market stability in response to the tariffs.

Global head of Commodity Markets - Oil, Mukesh Sahdev said, “OPEC+ is facing a new challenge with President Trump’s tariffs on major crude suppliers, which could disrupt global oil demand and production. While the group may unwind its production cuts as announced in the second quarter to manage market stability, tariffs on Canada and Mexico could force both countries to redirect crude, impacting US refineries and leading to potential price hikes.

Acting cautiously

"OPEC+ is likely to act cautiously, balancing its efforts to stabilise prices while also dealing with geopolitical tensions. As Canada heads into an election, its likely hard stance in retaliation could further complicate efforts, requiring OPEC+ to put in extra effort to ensure balance in the market.”

Currently, OPEC+ is primarily addressing the challenge of surplus supply by implementing cuts, while hoping for a recovery in demand that will allow for the reversal of these cuts. However, this seems less likely, with China delivering a much lower-than-expected recovery for several quarters. The tariffs implemented by the Trump administration will negatively affect demand, not only for the target countries but also globally, including the US.

Despite potential risks to demand from the new US administration's measures, OPEC, the US Energy Information Administration (EIA) and the International Energy Agency (IEA) all project global oil demand growth to exceed 1mn bpd in 2025, Rystad points out. The signal is that tariffs, if kept for long, have the potential to cause production losses in Canada and Mexico, which could help OPEC+ to unwind barrels. There is scope to bring back an average of 5.8mn bpd of extra crude from OPEC+ in case of significant loss from Canada and Mexico, says Rystad. The signal is that OPEC+ is likely to bring supply back only to keep a ceiling on prices, and is unlikely to act to lower prices as per Trump’s call.

While President Donald Trump’s return to the White House is thought to provide an upside to oil and gas activity, given his “Drill, baby, drill” initiative, it is likely to have a limited impact on oil and gas production and activity levels, while a more conducive regulatory environment is expected in relation to permits for liquefied natural gas (LNG) terminals, according to the energy consultancy.

The current sanctions and the loss of heavy barrels will also affect the blending of light barrels with heavy barrels to produce Middle Eastern crude grades, adversely affecting light-sweet US shale production. The signal is that the US must plan to source medium-sour crude barrels from other destinations, mainly the Middle East, rather than try to solve any shortages by increasing its light-sweet production. OPEC+ unwinding and offering incremental supply to the US cannot be ruled out.

“All these insights point toward a higher probability of OPEC+ following through on its plan of unwinding barrels in the second quarter of the year,” concludes Rystad.

“The key issues surrounding the Russia-Ukraine conflict, tightening Iran sanctions and European sanctions are likely to take a backseat as Trump seeks to navigate his way through the sanctions, expecting support from OPEC+. Once again, the supplier group finds itself caught between a rock and a hard place as its fights to ensure market stability.”