OPEC’s output increase masks deeper market uncertainties

[WORLD] In today’s global oil landscape, one thing seems increasingly evident: the reasons publicly cited by the Organization of Petroleum Exporting Countries (Opec) for raising output may not reflect the group’s true motivations.

On May 3, eight Opec nations involved in voluntary production cuts agreed to ease restrictions once again for June, collectively restoring 411,000 barrels per day (bpd) to the market. This latest increase brings the total output added since April to 960,000 bpd, or about 44% of the original 2.2 million bpd reduction, according to Reuters.

Opec’s official statement framed the decision around “current healthy market fundamentals,” referencing relatively low oil inventories. But market observers remain unconvinced. Analysts point to tepid demand from key economies, and the International Energy Agency (IEA) recently downgraded its forecast for 2024 global oil demand growth by 110,000 bpd, citing a sluggish European industrial sector and a slower-than-expected recovery in post-COVID China.

This disconnect has fueled speculation that the real drivers behind Opec’s decision are more geopolitical than economic.

Despite Opec’s claim of tight inventories, hard data suggests otherwise. The group’s own April monthly report showed OECD commercial crude stocks at 2.746 billion barrels as of February’s end—just 2.5% below the five-year average. That figure, while slightly down from the previous month, does not signal any significant supply tightness.

Recent figures from the U.S. Energy Information Administration (EIA) have further undermined the narrative. A surprise inventory build of 7.3 million barrels in the week ending April 26—the largest since February—indicates North American markets may already be sufficiently supplied.

While China does not disclose its storage data, estimates derived from import and refining figures suggest that the country added significantly to its reserves in March, posting a crude surplus of 1.74 million bpd. So what, then, explains Opec’s confidence in market health?

Asia’s crude import activity offers some clues. The region, which accounts for around 60% of global seaborne oil trade, saw import levels rebound in March and April following a February slump. According to data provider Kpler, arrivals averaged 25.27 million and 25.28 million bpd, respectively. However, total imports for the first four months of 2024 were still 280,000 bpd below last year’s figures, a drop that casts doubt on the notion of strong demand.

Meanwhile, non-Opec producers are ramping up output. The United States, Brazil, and Guyana continue to increase production, with U.S. output projected to hit a record 13.2 million bpd this year. That expansion poses a direct challenge to Opec’s influence and could trigger a drawn-out struggle over market share.

Some of Asia’s recent import gains were driven by short-term factors. In March, Chinese refiners boosted purchases from Iran amid fears of renewed U.S. sanctions, while April saw a rebound in Russian imports after a brief slump caused by tighter Western shipping restrictions.

Looking ahead, oil demand faces headwinds. The May-to-July period typically sees a seasonal uptick due to agriculture and construction, but escalating trade tensions threaten to sap momentum. The Trump administration’s 145% tariff on Chinese imports has already slowed container traffic and is expected to impact air freight in the coming weeks.

This decline in shipping volume is expected to spill over into road transport in both China and the U.S., potentially reducing demand for fuels. Weaker consumer confidence may also weigh on travel-related consumption.

Even if trade relations stabilize, the lag in shipping activity and supply chain adjustments could dampen oil demand for months to come. So what is Opec aiming for by raising output now?

Several strategic calculations may be at play. Saudi Arabia, the group’s dominant member, might be leveraging price pressure to enforce discipline among other producers or responding to U.S. political pressure to help keep gasoline prices in check during an election year. This would align with former President Donald Trump’s campaign rhetoric, though it risks harming the very U.S. shale sector he champions.

Opec could also be trying to curb output growth from costlier non-Opec sources by pushing prices down, making it less economically viable for rival producers to expand.

Additionally, Saudi Arabia’s recent diplomatic overtures—particularly toward Iran—suggest that regional stability and reduced price volatility could be part of a broader geopolitical strategy.

Ultimately, the market reaction paints a cautious picture. Brent crude futures slid as much as 3.7% in early Asian trading following the announcement, dropping to US$58.50 per barrel—down from US$61.29 on May 2. That response reflects a broader market consensus: rising supply against a backdrop of shaky demand points to further downward pressure on prices in the months ahead.