OPEC+ announced an increase in production, why didn’t the oil price fall?

Crude oil prices hover around $60 per barrel. The Organization of Petroleum Exporting Countries (OPEC) and non-member oil-producing countries such as Russia have decided to further increase production in August, but the market believes that the supply and demand situation will not ease in the short term and the reaction is relatively calm. Countries such as Iraq, which previously had overproduction, have begun to reduce production, weakening the effect of the production increase measures.

The eight OPEC+ countries (Saudi Arabia, Russia, Iraq, the United Arab Emirates, Algeria, Kuwait, Kazakhstan and Oman) that followed the voluntary production cut agreement announced at a meeting on July 5 that production in August will increase by an average of 548,000 barrels per day from the previous month. This increase is about four times the original plan announced in March, equivalent to a 33% increase in the increase in production from May to July.

WTI (West Texas Intermediate) futures, the US benchmark, fell 2% from the previous trading day in pre- and post-market trading on the morning of July 7 in Asia time, hovering around $65 per barrel. North Sea Brent crude futures, the European benchmark, fell only 1%.

The prospect of supply growth usually leads to price declines. When the production increase that exceeded market expectations was announced in April and May, crude oil prices once fell to around $55, and panic selling expanded.

However, the market was slow to react to the news of the expansion of production.

Many opinions believe that actual production will not increase as announced. The monthly report released by OPEC on June 16 showed that the production of eight countries in May increased by about 150,000 barrels per day from the previous month. It was significantly lower than the production increase target of 411,000 barrels announced in April.

Countries that have overproduced beyond OPEC quotas, such as Iraq and Kazakhstan, have begun to reduce production. The monthly report shows that Iraq’s production in May was 50,000 barrels less per day than the previous month.

To maintain the balance between supply and demand, OPEC+ uses three mechanisms to adjust production: (1) All member countries coordinate to reduce production by 2 million barrels per day; (2) Some countries voluntarily reduce production by 1.66 million barrels per day; (3) Some countries voluntarily reduce production by 2.2 million barrels per day.

Among the three mechanisms mentioned above, item (3) has been gradually reducing the reduction since April. The original plan was to reduce production in stages over 18 months, but OPEC+ is trying to speed up the process. It is expected that the reduction will be about 1.92 million barrels per day in just five months to August.

One of the reasons why item (3) is being reduced is Saudi Arabia’s dissatisfaction with over-producing countries such as Iraq. If countries increase production at will, the overall effect of production regulation will be greatly reduced. For this reason, OPEC+ intends to adopt a strategy of lowering oil prices to warn those countries that increase production without authorization, thereby enhancing the cohesion within the organization.

At present, due to seasonal factors, oil demand remains strong. Naveen Das, senior crude oil analyst at Kepler, a European research company, said: “Due to the demand for power generation such as air conditioning, oil consumption in the Middle East will increase in the summer.”

According to Kepler data, OPEC members in the Middle East are expected to increase their oil consumption by about 400,000 to 500,000 barrels per day from July to August compared to June.

Production has not increased as much as expected, and demand is still strong, resulting in oil prices not falling as Saudi Arabia envisioned.

If there is a possibility of an oil supply surplus in the future, the time point may be after September. Once demand peaks and the market begins to pay attention to the issue of loose supply and demand, crude oil prices are likely to gradually fall.

“Whether to further relax voluntary production cuts will become the focus of production after September,” said Takayuki Nogami, chief economist of the Japan Energy and Metals and Minerals Corporation (JOGMEC).

In a report released on June 16, Citigroup of the United States pointed out that the medium-term market outlook “if there is no geopolitical chaos, there will be an oversupply of crude oil from 2025 to 2026”, and believed that the WTI crude oil price will fall to US$60 per barrel by the end of 2025.