OPEC+’s Relaxed Targets Reflect Bullish View Of Market

The surprise decision by OPEC+ to begin unwinding their 2.2 million barrels per day (mb/d) of voluntary cuts from April 1 sent oil prices tumbling and pundits scrambling for an explanation. Many political commentators thought the group was bending to pressure from President Trump, while others postulated that OPEC’s forecasted demand for its oil was optimistic. And of course, there is the possibility that some of the members, notably Saudi Arabia, wanted to punish those who were producing above their targets.

Needless to say, the thinking of OPEC+ ministers is not transparent, but there is a long history of pundits to ascribing the group’s (especially by the Saudis) as being driven by non-economic, political motivations. Saudi support for production cuts have often been attributed to unhappiness with the existing U.S. administration, whether over support for Israel, negotiations with Iran, or some more nebulous concerns, but in every case, the cuts came when prices were weakening, inventories building and/or markets were predicted to soften.

Yet the fact remains that, except for the price collapses of 1986 and 1998, every U.S. administration has always encouraged the Saudis and OPEC to increase production and reduce prices, and been consistently ignored. While there might be some correlation between Saudi production policies and U.S.-Saudi relations, the reality seems more prosaic: OPEC relies on market trends, actual and predicted, far more than it responds to political events.

Second, it is quite possible that the Saudis have done what they did in 1998, which is to accept increased production quotas in response to constant overproduction by several of the members, notably Iraq, Russia and the U.A.E. The figure below shows the IEA’s estimates of the amount of production above target from those members and while it decreased in January, that was primarily due to equipment failures in Iraq and, apparently, tighter sanctions on Russia.

This could worsen, as, first, the Baghdad government reached an agreement with Iraqi Kurdistan that could add 200 thousand barrels per day (tb/d) to supply and President Trump might relax sanction enforcement on Russia which might see even more added to the market. Additionally, the U.A.E. had earlier been granted an increased target of 300 tb/d, but repeatedly delayed implementation, most recently to April 1^st. It is an open question as to whether that will result in them being on target (moving the target to meet the arrow, as it were), or if they will then increase production further and continue to remain above target. At any rate, there is good reason to think that the unwinding of voluntary reductions is partly driven by a desire to punish the free-riders.

Finally, it could be posited that OPEC+ expects the market tighten as the year progresses, so that the additional crude could be easily accommodated without a major price impact. It is true that the IEA forecasts that demand for OPEC crude oil (plus stocks) will drop by 400 tb/d this year, but they have been revising this upwards over the past few months.

And the official forecast from the OPEC Secretariat is significantly more bullish than the IEA’s. The table below compares the two, and the OPEC forecast is for 350 tb/d more demand and 390 tb/d less non-OPEC supply than the IEA projects.[1] The current production plan would see an increase in OPEC+ supply of about 1.4 mb/d from March to December, or an average of about 600 tb/d for the year.

Can the market accommodate this amount? The IEA’s forecast suggests that this would result in an inventory build of 1 mb/d, which would certainly pressure the price. But the OPEC forecast, as shown, for needed additional production of 440 tb/d to avoid inventory growth suggests that their expectations are for minimal impact on prices from the relaxation of voluntary cuts.

Two specific elements of the OPEC press release provide some evidence of their thinking, albeit very weak. Those producing above targets have “agreed to frontload their compensation plans” meaning it is assumed that overproduction will decline, further supporting prices despite increased targets. This does not mean that their failure to do so will see others continue to raise production even if prices weaken. If the other producers do not pause the unwinding in the face of weaker prices, then the implication is that the current production schedule is in part driven by a desire to rein in overproduction.

The other salient comment is that “this gradual increase may be paused or reversed subject to market conditions.” Arguably, such a statement is unnecessary since OPEC+ has typically responded to market conditions and promptly, at least in recent years. (The 1990s were a different time.) Still, that implies that the unwinding reflects a more bullish outlook for demand for OPEC+ oil is driving the move and that they will respond to falling prices, not let them drop to punish those over their targets.

Given uncertainties about U.S. sanction and tariff policies, and their impact on Iranian, Russian and Venezuelan supply as well as global economic growth, the market outlook is highly uncertain. Expectations about OPEC+ production targets certainly contribute to this, but how they respond should prices remain depressed will provide strong evidence of their motivations, both now and moving forward.

[1] The IEA supply figure is for all non-OPEC, while OPEC forecasts only those non-OPEC members which are not part of OPEC+, but the difference in 2025 production seems small, since the IEA expects that Russian production will be down slightly this year, and no other members are likely to increase significantly.