Although stocks retreated and oil edged higher on Friday, the story of the week was the mirror image of these performances. A weak private US job market report, in the absence of official data, reaffirmed expectations that two more interest rate cuts are forthcoming this year. The astronomical tech valuations clearly bear all the hallmarks of FOMO and herd mentality. We do not doubt that this rally is unsustainable and that a nasty correction is in order once deteriorating economic data warrant it, as tariffs begin to bite. Of course, putting a time frame on such an assumption is impossible; therefore, this ominous prognosis lacks substance. Nonetheless, the fact remains that US equities gained another 1-1.5% last week.

The mood was markedly different in oil. In Friday’s report, we listed developments that point to a palpable increase in global supply. These include rising September OPEC+ output, the resumption of Kurdish oil flows, healthy Venezuelan exports, and unsold Middle Eastern barrels expected next month. It does not take a stable genius to quantify the extra supply: an arbitrary but conservative estimate would put it at around 930,000 bpd, also factoring in the additional 137,000 bpd production OPEC+ agreed on over the weekend, which temporarily has sent prices higher this morning.

This is a hefty volume, unlikely to be fully absorbed, with a sizeable portion bound for storage. There was also a clear and collective build of more than 1 million bbls in distillate inventories across major hubs, which, despite ongoing Ukrainian attacks on Russian refineries and Russia’s diesel and distillate export restrictions, removed another layer of support from under oil. Both crude oil benchmarks and the CME Heating Oil contract plunged around 7% last week. Betting against renewed weakness, at this point, despite the early morning bounce, would be a brazen move.

The Right Call at the Right Time

It is not hindsight to say that the policies of the OPEC+ alliance to manage output in recent years, and at the beginning of the current one, were unsustainable. In the past, the group’s intention to balance the market by taking barrels off it was usually met with rising prices, often exceeding the scale of the output cuts. In other words, there was a financial incentive to reduce production and surrender market share.

Over the last two to three years, however, this strategy has proved ineffective. A year after the initial shocks of Russia’s invasion of Ukraine began to fade and prices drifted lower from the March 2022 high of nearly $140/bbl, OPEC’s collective output stood at 28.9 mbpd, with the group’s basket price averaging $81.88/bbl in February 2023. This generated a daily income of $2.4 billion. As the group’s production constraints came into effect, prices failed to respond. According to independent secondary sources, relied upon by the organisation to estimate output levels, OPEC produced just over 26 mbpd in September 2024. And the revenue from petrodollars? A mere $1.92 billion a day. A 10% cut in output, combined with a 10% decline in the basket price, resulted in a 19% drop in income.

As producers outside the group, competitors such as the US, Brazil, Canada, and Guyana, happily filled the void left in the market by OPEC and its peers, it became increasingly evident that when reducing output does not yield results, a rethink is inevitable. That rethink came in the first half of the year, when the group decided to bring forward by a year the planned unwinding of the initial 2.2 mbpd supply constraints. Between December last year and September this year, OPEC increased output by 1.7 mbpd. In yesteryears, such a move would have been sufficient to have a palpable adverse impact on prices. Not this time. Despite the discernible increase in production, oil prices have fallen only marginally, and this weakness has been neatly offset by higher output. Petrodollar revenues even ticked slightly upward.

The timing of this decision seems impeccable for several reasons. As illustrated by the recent strength in distillates, there has been a considerable shortage of product due to persistent Ukrainian assaults on Russian refineries. This disruption can potentially be alleviated by pumping more sour crude, the characteristic staple of Middle Eastern OPEC countries. It also appears likely that international sanctions on Russia and its shadow fleet will remain in place, or even be tightened, making the extra oil from OPEC a potential replacement for these barrels.

Another factor to consider is that several OPEC members, together with their peers, are already pumping close to their limits and cannot increase output further. Reuters calculates that the group’s collective production is about 500,000 bpd below the declared target. This deficit is not solely the result of capacity constraints, though it is worth noting that whatever spare capacity exists (around 4.1 mbpd in August, according to the IEA), it is confined to Saudi Arabia and the UAE. The struggle to match quotas is also due to compensatory cuts, as disobedient members, particularly Kazakhstan and Iraq, are required to make additional sacrifices to atone for past overproduction. A further bonus, and an invaluable relief for OPEC producers, is that the current price level goes a long way toward blunting the US President’s ire, as domestic retail gasoline prices remain at a politically acceptable height.

There is, as always, a great deal of unpredictability surrounding global oil supply and demand. The geopolitical backdrop and the current OPEC+ internal dynamics, however, justify the group’s decision to gradually increase production. The price reaction, last week’s weakness notwithstanding, supports this move. And there is a longer-term implication of the effort to regain market share. By keeping oil prices at an acceptably subdued level and preventing them from rallying sharply or testing the year’s highs, OPEC+ makes renewable energy less competitive and may slow the transition from fossil fuels to alternatives. Unless oil plunges below $55–$60 on a protracted basis, there will be no need for the producer group to reconsider its newly implemented market management strategy.

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