The Opec+ countries, including Saudi Arabia and Russia, have decided to further increase their oil production in the summer. Starting in July, a core group of eight countries – consisting of Saudi Arabia, Russia, Iraq, the United Arab Emirates (UAE), Kuwait, Kazakhstan, Algeria, and Oman – will raise their joint daily production by 411,000 barrels (each 159 liters). This marks the third consecutive month of such an increase, following similar production boosts already decided for May and June.
Background of the Decision
The decision was made by Opec+ “in light of stable global economic forecasts and the currently healthy market fundamentals.” The cartel controls about 40 percent of the global oil production, significantly influencing the direction of the global oil market. Western countries like the USA, Canada, or Norway are not part of the cartel.
Impact on Oil Prices
In anticipation of this increase in production, oil prices have already fallen in recent days. Should supply continue to rise – especially without a corresponding increase in demand – this could lead to further price declines. This would also burden the cartel’s revenues.
Historically, Opec+ has pursued a strategy of stabilizing the price at around $90 per barrel through an artificially restricted supply. However, with the current decisions, the cartel is moving away from this strategy. Particularly Saudi Arabia relies on a high oil price to cover its state expenses; other member states, on the other hand, are pushing for higher production volumes to increase their revenues.
Potential Consequences for Investors and Savers
For investors in commodities, an increase in supply with steady or declining demand typically means:
- Falling Commodity Prices: An oversupply of crude oil can lead to falling prices.
- Volatility: Markets react sensitively to changes in the supply-demand balance.
- Return Opportunities: For speculative investors, falling prices can present opportunities (e.g., short positions), while long-term investors may need to realize losses.
- Inflation Pressure: As energy prices significantly impact inflation, a falling oil price can exert disinflationary pressure.
Summary
Opec+ is again increasing production levels in the summer: in July, the third monthly increase of 411,000 barrels per day will occur through eight core countries of the cartel. This measure comes despite potential risks of price decline and internal conflicts within the alliance regarding production strategies and revenue targets of individual members. For investors, this means increased uncertainty in the commodity market as well as potential return opportunities or risks depending on their positioning.
“With the decision, the oil cartel is moving away from its original strategy.”
— Handelsblatt on Opec+