Oil prices have fallen sharply since OPEC+ announced on March 3 that it would proceed with its plan to increase oil production. The move is seen as a response to growing concerns about supply from other key oil producers and the uncertain demand from China, the world’s largest oil importer. For former President Donald Trump, lower oil prices are crucial for his second term agenda. However, despite OPEC+ members’ higher budget breakeven prices, many are questioning why they are backing such a potentially costly production hike.
For most OPEC+ members, keeping oil prices at the higher end of recent levels is economically essential. Since 2022, OPEC+ has refrained from increasing production, opting instead for cuts to stabilize prices. In fact, the group implemented reductions of around 5.85 million barrels per day (bpd) by the end of 2022, nearly 5.7% of global supply. In December, the group extended these cuts by 2.2 million bpd until the end of the current quarter. However, estimates indicate that production cuts will be reduced by approximately 138,000 bpd in April, with further cuts expected.
A senior source in the European Union’s energy security sector revealed to OilPrice.com that part of the reason behind OPEC+’s production increase stems from overproduction by some members, particularly Kazakhstan, Iraq, and Russia. Moscow, in particular, has been using unofficial channels to sidestep sanctions. The source added that another reason for the production hike is OPEC+’s desire to protect its market share amid shifts in supply and demand. Furthermore, the group’s leaders likely understand they cannot win an oil price war against the U.S. if Trump returns to office, considering the failures of past price wars.
OPEC+ is still dealing with the aftermath of the 2014-2016 oil price war, which was triggered by Saudi Arabia’s decision to flood the market and challenge the U.S. shale oil industry. This strategy, however, severely damaged OPEC’s finances, with Saudi Arabia spending over 34% of its $737 billion foreign exchange reserves, resulting in a record high deficit of $98 billion. By 2016, Saudi Arabia’s deputy economic minister warned that the country could face bankruptcy within a few years without reforms. The war led to a $450 billion revenue loss for OPEC members, according to the International Energy Agency (IEA).
In the wake of these losses, Trump was able to exploit the weakness within OPEC to keep oil prices within a tight range during his first term. The “Trump Oil Price Range” targets a price of $40-45 per barrel for Brent crude, a level that allows most U.S. shale producers to break even and generate profits. The upper end of the range is $75-80 per barrel, a level that is beneficial for U.S. economic growth and historically linked to gasoline prices under $2 per gallon. Trump’s stance on oil prices remains unchanged for his second term, as reflected in his ‘Agenda47’ plan.
The pressure on OPEC is mounting, especially as Trump’s second term would likely see him with more power in the U.S. government, with Republican majorities in both the Senate and House. The Saudis are aware of Trump’s stance, which was made clear during his first term when Saudi Arabia attempted to recover from the 2014-2016 price war. Trump’s response was swift: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it.”
Trump’s hardline stance also reflects a shift in U.S.-Saudi relations, particularly after the 2014-2016 price war. Prior to the war, the foundation of U.S.-Saudi relations was a deal made in 1945, in which the U.S. guaranteed Saudi security in exchange for a steady supply of reasonably priced oil. However, by the end of the price war in 2016, the agreement effectively changed. The new deal ensured U.S. oil security, but it also stated that Saudi Arabia could not jeopardize the economic well-being of the U.S. A senior White House official even noted that the U.S. would no longer “put up with any more crap from the Saudis.”
As OPEC+ continues to face internal and external pressure, its decision to increase production amidst a shifting global market presents risks. While OPEC+ members are trying to protect their market share, the challenge of balancing production levels with rising global uncertainties remains a difficult task.
Related Topics:
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- Will OPEC Stand by as Non-OPEC Oil Makes Strides?