OPEC+ Is Rushing Toward a Production Strategy Crossroads

On Saturday, Saudi Arabia and its partners agreed to further accelerate plans for reviving crude production, despite signs of an impending oversupply in world markets. The full rationale remains opaque.

Delegates from the Organization of the Petroleum Exporting Countries described the strategy as a paradigm shift: Tired of trying to shore up prices by curbing output, the group is now aggressively reclaiming lost market share.

To explain the even bigger ramp-up scheduled for August, officials point to seasonal factors. Oil demand peaks during the Northern Hemisphere summer, so there’s a bigger market to claim a share of, they contend.

For the time being, these two objectives dovetail nicely. But they won’t do so indefinitely.

OPEC+ will meet next month to contemplate a further supersized hike for September, by which time the summer surge in consumption will be ebbing away.

If the organization is genuinely focused on seasonal dynamics, it ought to abstain from that extra boost and perhaps even roll back some of the recent production increases.

But if Riyadh and its partners crack on with another 548,000 barrel-a-day hike, that will suggest they are indeed committed to a structural change: away from supporting prices and toward the pursuit of market share.

Of course, it might not be a permanent position.

Despite OPEC+’s claims of subduing market volatility, its policy has zigzagged at least three times in the past six months: first slowing down the production revival, then accelerating it and now speeding up the acceleration.

Riyadh’s pivot toward a market-share strategy a decade ago was similarly ephemeral, folding within 18 months when the costs of battling US shale drillers proved too onerous.

Whichever branch of the crossroads OPEC+ takes on Aug. 3, it could still reverse course later. But the initial choice will offer more insight into the cartel’s thinking than it’s willing to share publicly.

–Grant Smith, Bloomberg News