Pragmatic recalibration: OPEC+ plays the long game beneath the chaos

Much ink has been spilled in dissecting the OPEC/non-OPEC alliance’s unexpected decision to accelerate the phaseout of its production cuts through May and June, which heaped more pressure on crude prices already reeling from a worsening global economic outlook.

A lot of the analysis misses the mark as it assumes one-dimensional objectives of the group and retrofits the prognosis to a pre-ordained narrative of imminent collapse.

OPEC+ is an organisation of 21 nations (we exclude Mexico, as it has not participated in the collective production agreements since mid-2020) with vastly different oil production costs and capacities, economic profiles, and dependence on oil revenues to meet budgeted government spending.

Overseas upstream investment

National oil companies dominate oil production in most member countries, enabling their energy ministries to mandate a ramp up or down in accordance with targets agreed with OPEC+, but others struggle when such directives clash with the terms of contracts signed with independent or foreign producers and aspirations to attract overseas upstream investment.

There is another major dichotomy within the group now. Only eight members have made incremental output curbs since January 2024 because the remaining 13 have languished way below their targets, unable to revive production after making unprecedented deep and prolonged cuts in response to the Covid-induced demand crash of 2020.

External challenges, especially unpredictable market behaviour under uncertain economic conditions, is bound to test the cohesion within the group. Covid was one such event. US President Donald Trump’s unprecedented tariff wars unleashed around the globe in recent months is another one.

Historical precedents

While evaluating OPEC+’s response to market forces and survival in the face of heightened turmoil, neither should the group be seen as a paragon of unwavering solidarity nor as one perpetually teetering on the brink of collapse. The truth lies somewhere in between. While the common and collective aim of the producers is to try and avert extremes of oversupply or tightness in the market, they have no crib sheet to go by and historical precedents are often poor proxies for fresh challenges.

Importantly, individual members strive to balance crude price targets by acting as an alliance with protecting and growing market share in alignment with national interests. This juggling is harder in times of sluggish oil demand growth and bearish markets.

Strengthening the alliance

It may seem logical to interpret the March decision by eight OPEC+ members to unwind their collective 2.2 million b/d of production cuts over April 2025 to September 2026 despite consensus market expectations of a looming supply glut and the subsequent tripling of the planned supply boost in May and June as signs of a gradual unravelling of the alliance.

In reality, the opposite may be closer to the truth.

By deciding to proceed with returning the 2.2 million b/d to the market -- after three postponements from the original October 2024 start -- OPEC+ was acknowledging its constraints and opting to preserve cohesion over fighting a losing battle.

With just eight of the 18 quota-bound members reining in production and clearly at the end of their tether, OPEC+ likely viewed a continued attempt to put a floor under crude in a year shaping up to be challenging on the global economic and oil demand fronts as not only a futile exercise, but one likely to bring it to the brink of collapse.

The agreements to treble the May and June supply boosts to 411,000 b/d in a radical shift from the initial plan for gradual monthly increments of around 140,000 b/d were guided by evolving internal dynamics around quota-busting, in particular an intractable situation involving Kazakhstan.

The Kazakhstan situation

A recently completed expansion project by a Chevron-led consortium operating Kazakhstan’s giant Tengiz oil field has boosted its crude capacity by about 260,000 b/d to nearly 1 million b/d. Astana has indicated its inability to force the consortium in the field to rein in output.

Kazakhstan’s newly appointed Energy Minister Yerlan Akkenzhov last month said the country would prioritise national interests over OPEC+ commitments in deciding production policy. Though the ministry tried to water down the comments the minister had made to the media, the cat was out of the bag.

Astana has doubled down in recent days, with the energy ministry telling reporters that it plans to pump about 1.77 million b/d of crude in May, which implies 400,000 b/d of overproduction compared with its quota for the month, net of the “compensatory” cut promised to offset previous months’ excess supply.

Squeezing shale production growth

The surplus is way higher than the overproduction typically seen from the likes of Iraq and Russia.

Back-channel discussions with Kazakhstan may be ongoing but whether it leaves OPEC+ or stays put, in all probability pumping at full tilt in either case, the accelerated unwinding of cuts gives the quota-compliant members of the Group of 8 -- Saudi Arabia, the UAE, Kuwait, Algeria and Oman -- a clearer path to claw back market share.

This underpins our contrarian view that the so-called dovish tilt is less a sign of disintegration than a pragmatic recalibration that may, in fact, bolster the alliance’s durability. It also offers the collateral advantage of squeezing production growth in the US shale sector.