Five reasons OPEC+ is right to proceed with its supply boost

The OPEC/non-OPEC alliance made the right decision on March 3 to proceed with a gradual tapering of the 2.2 million b/d of collective production cuts by eight members from April, after having postponed the tapering thrice last year.

Though the move may have added to the downward pressure on crude, the main reason for Brent futures crashing through $70/barrel, a floor the alliance would likely want to defend, was the tariff wars unleashed by US President Donald Trump against Canada, Mexico and China.

After a month’s postponement, the US’ 10% import tariffs on Canadian energy, 25% on all other Canadian goods, and 25% tariffs on all Mexican goods took effect on March 4, rattling financial markets. An additional 10% universal import tariffs against China were implemented from the same date, on top of the 10% tariffs imposed a month ago. The spectre of multiple trade wars stalling US and global economic growth weighed on sentiment and oil demand expectations.

A few market participants and observers were surprised that OPEC+ (G8) did not defer their supply boost again. There were at least five good reasons for the eight members to stick to their December 5 agreement to phase out the cuts, and, by the way, Trump’s exhortation to OPEC and Saudi Arabia “to bring down the cost of oil” in a January 23 address to the World Economic Forum was most likely not one of them.

Sentiment versus fundamentals: Market sentiment on oil demand has turned bearish on the back of President Trump’s rapid-fire imposition of import tariffs and threats of more to come against Canada, Mexico and China in particular, and countries across the globe in general.

In addition to the latest punitive measures against Canada, Mexico and China, President Trump has threatened to impose 25% tariffs on all steel and aluminium imports into the country, 25% duties against the European Union, and universal reciprocal tariffs against all countries.

The import duties risk raising the prices Americans pay for a range of imported goods, inflaming inflation, making the Federal Reserve more hawkish, weakening the job market, and dampening consumer confidence and spending, stalling economic growth.

But President Trump’s tariffs and threats have been highly unpredictable with cancellations, postponements from initial start dates, and exemptions post-implementation, which may be par for the course. If the endgame is extracting the pledges and deals the US wants from the countries being targeted, the tariffs are an interim measure and nothing can be reliably extrapolated from markets’ frequent knee-jerk reactions along the way.

While one may take issue with OPEC’s mention of “healthy market fundamentals” and “positive market outlook” in its statement on the March 3 decision, crude’s dive on fleeting and fickle sentiment driven by President Trump’s tariff storms cannot be relied upon as reflective of short-term supply-demand balances, either.

Gradual boost, room to change course: The eight members had agreed on December 5 to spread out the 2.2 million b/d of supply boost over 18 months starting in April this year, replacing the previous 12-month timeframe.

It made the increments smaller, amounting to about 137,000 b/d being added to the supply pool each month, on average.  

Under the plan, the eight members’ target output will be about 688,000 b/d higher on average over April-December 2025 compared with the first quarter of this year.

The latest monthly forecasts by OPEC as well as the US Energy Information Administration (EIA) and the International Energy Agency (IEA) see global oil demand rising sequentially through the second to fourth quarters of this year.

The surprisingly aggressive and sweeping oil sanctions against Russia implemented by the Biden administration on January 10 and Trump’s more recent tightening of sanctions against Iran and Venezuela also create potential crimps in crude supply that could be offset by the tapering plan.

The OPEC+ (G8) have kept the door open to pausing or reversing the phaseout of the cuts in line with market conditions, which is in sync with the major demand uncertainties that have appeared on the radar for this year. A more gradual unwinding of the cuts affords the producers more time to react.

Alleviating cost pressures: As major European economies succumb to stagflation and fears of the same phenomenon gripping the US swirl in the market, the prospect of slightly softer crude prices is welcome, even if accompanied by the global market tipping into a slight oversupply as a result of the OPEC+ boost.

Benign fuel prices may not neutralise all the cost pressures being felt by consumers across the developing and developed world, but would go some way in easing inflation, which appears to have turned stubborn over the past few months on its way down from multi-year highs.

A balancing act: OPEC+ is a group of highly diverse producers with varying economic strengths, oil production profiles, dependence on oil revenues, and national budgetary imperatives, among other things. Some of the Group of 8 members have invested in increasing production capacity in recent years, prominently the UAE and Kazakhstan.

The 2.2 million b/d of “voluntary” curbs were asymmetric, being pledged by only 8 of the 18 OPEC+ members that participate in collective production policy agreements that have historically distributed agreed supply cuts as well boosts equitably. It was further skewed by Saudi Arabia volunteering a proportionately bigger reduction in its production since 2023. OPEC+ needs to balance its aim to be a stable and balancing force in the market with the need to maintain strong unity and cohesion among its members.

Matter of credibility: Finally, a significant move such as returning 2.2 million b/d of crude to the market can only be postponed so many times without the decision-makers risking their credibility in the market and prompting pointless speculation around their intentions. A fourth deferral would not have looked good.