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OPEC does two things well. It produces oil and manages markets with its advantages. Cartels have long cited selling more barrels at lower prices by reducing production and maintaining high oil prices. So when the Saudi-led group announced a massive increase in production, observers were confused.
All of that oils moisten the demand. OPEC+ – The name given to the cartel is an allies such as Russia – could add 2.2 million barrels per day by the end of September. This year, oil demand is set to increase by less than 1 million barrels a day, according to the International Energy Agency. Worse, non-OPEC countries will expand their daily production this year at 1.3 million barrels. Much of this comes from long-standing projects that don’t stop erupting just because oil prices fall.
Naturally, it sent a slide of oil prices. This year, it fell by about 15% to $65 per barrel. According to the IMF, Saudi Arabia needs prices above $90 to balance its budget.
Why do oil producers want to lower prices? Strategic pivots could be a way to punish the members of the cartel that are producing more than they agreed to. It may help to curb the impact of further US sanctions on Iranian oil. Low prices are also a gift to US President Donald Trump to help American consumers.
However, OPEC may not have to endure this pain for a very long time. Large companies in non-BC countries such as Exxonmobil, Shell and BP have recently found relatively few new oil fields. According to an analysis by Goldman Sachs, a top project in the sector, over the past five years, new non-stock discoveries averaged 2.5 billion barrels per year, less than a quarter of the past three years.
Given the long lead times between success and production of drill bits, the oil major is still growing from previous discoveries. However, from 2027 onwards, pumps from traditional projects will begin to decline. Similarly, US shale oil, a huge factor in supply growth, is expected to peak in 2027 and will begin to decline afterwards, according to the US Energy Information Agency. Demand is difficult to predict, but most observers expect it to continue growing until at least the end of the decade.
Prices should ultimately rise as rivals run out of juice, and the cartel will increase market share. For listed companies with shareholders to serve – BP in particular is being held at the heels by the management of Elliott, a debt and activist investor, but the current oil slump is even more painful. Some of the OPEC’s many nature funds have the ability to play long games.
camilla.palladino@ft.com
