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It’s easy to dismiss the decision by the core members of OPEC+ to increase their crude oil production quotas for September as a meaningless gesture in the face of disruptions caused by the Iran conflict.
Certainly, as long as the Strait of Hormuz remains largely closed and the threat to the nearby Bab el-Mandeb waterway remains unresolved, there is little chance of the oil-exporting group being able to ship what they have agreed to produce. The seven members of OPEC+ undertaking voluntary output cuts — Saudi Arabia, Russia, Iraq, Kuwait, Algeria, Kazakhstan and Oman — agreed at a meeting on Sunday to increase production by 188,000 barrels per day (bpd) for September.
This completes the phased rollback of a 1.65 million bpd supply cut originally agreed in 2023, when the group still included the United Arab Emirates, which left the Organization of the Petroleum Exporting Countries in May. For the moment it matters little what the production quotas are, with the latest data from a Reuters survey showing the eight members of OPEC with quotas pumped 20.276 million bpd in June, which was 6.246 million bpd below the agreed target. Russia, the main non-OPEC member of the wider OPEC+ group, had production of 8.928 million bpd in June, according to OPEC data, which was almost 1 million bpd below its agreed quota.
While OPEC+’s decision to wind back voluntary production cuts carries little weight in the current market, it does highlight the challenges facing oil exporters and importers.
THREE OPTIONS
There are three main scenarios facing the crude oil market, and there is still a high degree of uncertainty as to which is the most likely.
The first is that Iran and the United States manage to reach a peace deal that allows sustained and unfettered passage through the Strait of Hormuz and the Bab el-Mandeb.
The second is that the conflict continues in fits and starts, with periods of escalation followed by hopes of a ceasefire and a deal, before these are dashed and missile and drone strikes resume.
The third is that the ladder of escalation persists, U.S. President Donald Trump orders strikes against civilian and energy infrastructure and Iran retaliates by doing the same against the Gulf states that host U.S. bases, such as Saudi Arabia, Kuwait and Iraq.
The crude oil futures market appears to be largely priced for the first option, with benchmark Brent contracts dropping 6.8% in early Asian trade on Monday to $83.98 a barrel.
This is some 34% below the highest so far in the Iran conflict of $126.41 a barrel hit on April 30, and is only 16% higher than the $72.48 close on February 27, the day before the U.S. and Israel launched strikes against Iran.
If the first option is what is delivered, then crude oil is likely to drop rapidly from current levels.
It’s likely that OPEC+ members will be able to ramp up production relatively quickly and will put more barrels into the market at a time when other producers are also trying to maximise exports.
It’s also likely that a comprehensive peace deal would see Iran free to openly sell its crude, meaning that only Russian oil may be subject to some Western sanctions.
If the second option is what prevails in coming months, the OPEC+ decision to lift output becomes largely irrelevant.
What then matters is how much oil manages to get through the Strait of Hormuz, and how effective the Saudi exports via the Red Sea and the United Arab Emirates from the Gulf of Oman are at offsetting the loss of Hormuz volumes. In this scenario, crude oil is likely to be volatile and driven by media headlines of Trump’s social media tweets. The third case is the one that markets hope will never eventuate as it implies long-term and significant damage to the energy infrastructure in the Middle East, which would result in global economic pain as the world adjusts to losing as much as 20% of its crude and liquefied natural gas supplies.
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The views expressed here are those of the author, a columnist for Reuters.
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