Oil prices fell sharply on Monday, driven by growing concerns over a global supply glut after Opec+ decided to raise production for the second consecutive month.
Brent crude, the global benchmark, dropped more than 4% to fall below $59, nearing the four-year lows reached last week. West Texas Intermediate, the US benchmark, also dropped to just under $56.
The price drop followed an announcement by eight Opec+ members, including Saudi Arabia and Russia, to boost supply by 411,000 barrels a day in June. This decision came despite falling oil prices driven by fears of oversupply and economic weakness linked to the ongoing trade war between the US and China.
Last month, Opec+ surprised the market by increasing production by the same amount, more than three times what was expected. The combination of higher supply from Opec and concerns over the impact of US trade tariffs on the global economy caused Brent crude prices to fall nearly 20% in April, marking the largest monthly decline in over three years.
Jorge León, a former Opec employee and now with energy consultancy Rystad, described the decision by Opec+ as a major shift. “Opec+ has just thrown a bombshell into the oil market,” he said. “Last month’s decision was a wake-up call. Today’s decision is a clear sign that the Saudi-led group is shifting strategy and focusing on gaining market share after years of cutting production.”
For the past three years, Opec+ had reduced collective output by nearly 6 million barrels per day to support prices, keeping crude prices above $90 a barrel for much of 2022. However, this strategy has lost its effectiveness due to weak demand, rising US production, and lack of discipline among member countries in adhering to quotas.
Tensions within Opec+ have risen, especially with Kazakhstan, which has increased production from its Chevron-led Tengiz field and signaled it will prioritize national interests over Opec quotas.
In response, Saudi Arabia has begun reversing production cuts, pushing for the increase this month. The kingdom, which had reduced its own output by 2 million barrels per day over the past three years, has grown frustrated with carrying the biggest share of cuts while countries like Kazakhstan and Iraq have consistently exceeded their quotas.
Saudi Arabia is reportedly now comfortable with increasing supply, even if it means maintaining lower prices for a longer period. This shift in strategy is particularly significant for the kingdom, which has been struggling to balance its national budget due to weaker oil prices.
However, some analysts remain skeptical about how much of the planned increase will actually reach the market. Bjarne Schieldrop, chief commodities analyst at SEB, noted that Opec+ production in April had fallen by 200,000 barrels per day due to Venezuelan sanctions. He suggested that the planned increase might be limited if past quota violators like Kazakhstan, Iraq, and the UAE do not adjust their output.
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