OPEC plus: why the alliance countries decided to sharply increase production in May

Eight OPEC+ countries agreed to increase production by 411,000 barrels per day in May. The decision was made the day after US President Donald Trump signed a decree imposing large-scale duties on imports of goods from all countries. The market reacted to this news with a sharp drop in oil prices. The cost of raw materials decreased by more than 6% during the trading day. However, by April 15, eight alliance states will have to submit updated overproduction compensation plans to the cartel's secretariat. Experts believe that the parties to the agreement have decided to compete with the United States for market share and do not rule out that at prices of $ 60 per barrel they may reconsider their decision.

Increased oil production

Eight OPEC+ member countries decided to abandon previously adopted restrictions on oil production and increase it by 411,000 barrels per day in May, which is equivalent to three monthly allowances. The statement also notes that the increase in production was made possible due to the improvement of the oil market and a positive outlook, but it may be suspended or canceled depending on market conditions.

"The gradual increase may be suspended or cancelled depending on market conditions. This flexibility will allow the group to continue maintaining stability in the oil market. Eight OPEC+ countries also noted that this measure will provide an opportunity for participating countries to accelerate the payment of compensation," OPEC+ noted.

In addition, these countries confirmed their commitments on voluntary restrictions agreed upon during the OPEC+ ministerial committee in April last year (at that time, countries exceeding the agreed production volumes pledged to compensate them from January 2024). They also intend to submit updated plans for accelerated compensation of these volumes to the OPEC secretariat by April 15.

According to the new plan, Saudi Arabia's production quota will be 9.2 million barrels per day, and Russia's - 9.083 million.

New US duties

The news of the oil cartel came a day after US President Donald Trump signed a decree imposing duties on imports of goods from all countries. Reacting to this information, on the morning of April 3, commodity prices lost about 3% and traded above $73 per barrel.

According to Ekaterina Kosareva, managing partner of WMT Consult, despite the fact that the American leader announced the decision on fees in advance, the market did not expect such a harsh approach.

— The American leader not only announced the introduction of a base tariff of 10%, but also higher duties for individual countries. The market immediately reacted with a drop in world oil prices to expectations of a slowdown in global economic growth and a decrease in energy demand," she told Izvestia.

And after lunch, the fall in oil prices accelerated. By 15:40 Moscow time, Brent was losing 7%, less than $70 was given for a barrel of raw materials, but subsequently regained 1 percentage point.

— The decision of OPEC +, on the one hand, is a bit surprising, as it seems that the oil cartel is following the lead of the American leader, who appealed to oil producers with a request to increase production. On the other hand, perhaps the alliance got tired of ceding its market shares and thus decided to oust the Americans, Ekaterina Kosareva believes.

She recalled that recently it has become more and more common to say that OPEC and OPEC+ may intend to drop oil prices in order to knock shale producers out of the market. According to her, the cost of shale oil production is an order of magnitude higher than traditional projects.

Other experts agree with her.

Ivan Timonin, Project Manager at Implementy, noted that "against the background of aggressive production growth from producers outside the alliance, primarily the United States, OPEC+ is striving not to cede its market share."

— I believe that OPEC+ has simply decided to reassure the parties to the agreement. Because many are worried: while they are holding back their production, other producers are increasing it or planning to do so, including Guyana, Brazil, the United States, Canada," added Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund.

Currently, the world leaders in oil production are the United States. The production of the United States is more than 13 million barrels per day.

How much oil production will actually be increased

According to Igor Yushkov, in practice, oil production is influenced by "those very compensatory factors."

— That is, they announced an increase of about 158 thousand barrels in April, but due to the fact that a number of countries, including Russia, had previously produced more than they were supposed to, they had to compensate for the excess oil produced. That is, in reality, they do not increase the volume of production," the expert noted.

And now, by April 15, eight OPEC+ countries will have to submit updated overproduction compensation plans to the alliance's secretariat. Therefore, it is not yet known how much production will actually be increased, he believes.

According to Alexander Frolov, Deputy Director General of the National Energy Institute, less oil will actually enter the market in May than announced.

— Higher recovery rates will allow Russia to get rid of overproduction debts two months earlier. Accordingly, the real additional revenues to the market from OPEC+ will be less than 411 thousand barrels," the source told Izvestia.

According to Igor Yushkov, if the price goes to around $60 per barrel in the near future, OPEC+ may reconsider its decision and still postpone plans to increase production and introduce additional quotas for June, thus keeping oil prices down.