The ongoing oil price tensions

OPEC+ oil war impacts global economy, India's oil imports, and geopolitical dynamics, analyzed by expert Mahesh Sachdev.

Just when you had your surfeit of headlines screaming of blood and gore, come the drumbeats of a new conflict. However, in this new one, the belligerents do not swap bullets but barrels. Yet, this incipient conflict is shaping to be a “mother of all battles” perhaps with a more universal impact than the destruction being wrecked in various corners of the world.

This prognosis may surprise observers who not only missed the weeks of its run-up skirmishes but also the bugle of war, when on May 3, the Organization of the Petroleum Exporting Countries Plus (OPEC+) decided to go ahead with a collective output increase of 4,11,000 barrels per day (bpd) from next month (June). This was the third month in a row that the oil cartel decided to raise crude production, cumulatively undoing the 9,60,000 bpd or nearly half of the 2.2 million bpd “voluntary” output cuts eight of its members undertook in 2023, to increase global oil prices in an oversupplied market. There are hints that the full 2.2 million bpd cut would be unwound by October 2025. Though the announced production rise was less than half a per cent of global daily production, the oil market was so jittery that the Brent crude price plummeted by almost 2% to $60.23/barrel, the lowest since the pandemic. It has since recovered to $65/barrel with support from the U.S.-China stopgap trade deal and reports of stalemate in the U.S.-Iran nuclear talks.

The oil market is still gutted and crude price is nowhere near the triple dollar mark that OPEC+ aimed for. Why, then, has this 23-member producer clique decided to reverse its tactic from reducing supplies to raising production? To find the reasons, we need to deep dive into the oil market of the post-COVID era.

Despite the expectation of a quick turnaround, global post-COVID economic recovery was mostly K-shaped leading to an anaemic growth in oil demand. Meanwhile, oil producers were desperate to ramp up their outputs to make up for lost revenue. It also did not help that several new producers, from the Shale oilers to non-OPEC+ countries, such as Brazil and Guyana, also wanted a piece of the shrunken demand. To square the circle, OPEC+ decided to take a collective production cut of five million bpd, nearly 10% of its total pre-pandemic output. When even this move did not shore up the oil price, a further “voluntary” cut of 2.2 million bpd was taken by eight members. This rope trick also failed to raise oil prices which continued to slide downwards.

While these processes were ongoing, Saudi Arabia, OPEC+’s largest producer, which took nearly three million bpd or 40% of the total production cuts, got increasingly infuriated by endemic OPEC+ overproducers, such as Kazakhstan, Iraq, the UAE and Nigeria. The Kingdom, often called a “swing producer” for its large spare production capacity, prefers stable and moderately high oil prices to ensure a steady oil revenue. However, it has made exceptions in 1985-86, 1998, 2014-16, and 2020 to pursue a market share chasing strategy to punish perceived overproducers. In the past, this market flooding strategy of Saudi enabled Riyadh to eventually impose production discipline among its peers, allowing prices to return to Riyadh’s desired levels.

Now, when repeated pleas failed to stop overproducers, and when Saudi Arabia’s average production fell below nine million bpd in 2024, its lowest level since 2011, Riyadh decided to repeat the playbook: an oil price war in the guise of accelerated restoration of voluntary production cuts.

However, many observers are less sanguine about the outcome of the Saudi campaign this time owing to several unique and different fundamentals. To begin with, this time the Saudis do not have the usual deep pockets needed to prevail. The oil market is more fragmented with large flocks of freelancing producers. High Capex has been sunk in ultra-deep offshore fields and other difficult geographies which need recovering, even at marginal costs, to avoid adverse political and economic consequences. Moreover, the crude exports by major oil producers such as Russia, Iran and Venezuela are currently hobbled by U.S. economic sanctions which may not last long.