Oil Prices Slide as OPEC+ Considers Another Major Production Increase

Oil prices declined after OPEC+ announced it is considering another major boost to oil output, adding up to 400,000 barrels a day in June. This follows the group surprising markets in May by boosting output increases to 411,000 barrels a day, close to triple the amount forecast by analysts, in an attempt to meet robust demand and trim inventory levels world-wide. The increase in production seeks to counterbalance market fundamentals as the growth continues in the emerging economies and in the increases in demand during seasonal patterns ahead of the Northern Hemisphere summer driving season.

OPEC+ participants like Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman have been progressively rolling back prior voluntary output cuts that added up to 2.2 million barrels per day that were first applied to help shore up prices. The recent production hikes reflect a tactical attempt to ensure price stability within a desired band of $80-90 per barrel, and also to solve compliance problems among members who have overrun quotas. The cartel wants to hold market share against growing non-OPEC output, mainly from the US and other nations.

Reaction in the market to the announcement has been a fall in crude prices, as the market expects the possibility of oversupply. Both Brent crude and West Texas Intermediate futures have fallen in reaction to the news. OPEC+ increases in production are made to be dynamic, with the flexibility to suspend or reverse them based on changes in market conditions. The group still meets monthly to monitor market conditions and revise policies.

This new development highlights the fine balance OPEC+ has to achieve between supporting member revenues, regulating global supply, and reacting to geopolitical and economic pressures from the major oil-consuming countries.

Sources: OPEC official statements, Bloomberg, Reuters, Enerdata, Discovery Alert, Business Times, MarketWatch.