Increased OPEC+ output hasn't loosened the tight oil market

Increased OPEC+ output hasn't loosened the tight oil market

The Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+) have launched their first output increases in three years, aiming to pump an extra 2.5 million barrels of oil a day in September compared to March. However, the market remains surprisingly tight, with strong demand, ongoing supply disruptions, and rising operational costs continuing to limit effective supply availability.

In June, U.S. commercial crude stocks were below their five-year average at 419 million barrels, while European oil stocks were almost 9% below their five-year average at 394 million barrels in May. Despite these increases, exports rose by just 460,000 barrels per day (bpd) from March levels, while world demand grew by an estimated 1 million bpd.

Iraq, Russia, and Kazakhstan are contributing to the problem. Iraq and Russia have found it hard to pump more, with Russia struggling with Ukrainian attacks on its energy infrastructure, limiting its production capacity. Kazakhstan was already producing at maximum capacity in March.

Saudi Arabia, on the other hand, effectively accounted for all of the increase, as it boosted exports by 631,000 bpd over the March-June period. Shipments from Russia, Iraq, Kazakhstan, Kuwait, and Oman fell.

The OPEC+ output increases in April involve only eight members: Saudi Arabia, Russia, Iraq, the United Arab Emirates (UAE), Kazakhstan, Kuwait, Oman, and Algeria. Between April and June, these eight members pledged to increase output by 960,000 bpd, but achieved an increase of only 540,000 bpd.

In their monthly meetings to set output levels, OPEC+ member states continue to seek higher quotas, even if immediate delivery is problematic. Brent crude futures have risen to around $68 a barrel from a 2025 low of $58 in April.

The robust demand, supply disruptions, and rising costs of production are key factors maintaining a tight oil market balance. While demand growth in 2025 is expected to slow to around 700,000 bpd, strong underlying consumption supports tightness in the physical oil market. Persistent supply issues, including geopolitical tensions and refinery downtimes, constrict effective supply flows.

Inflation and increased operational challenges, such as more complex drilling in mature shale basins and higher oilfield service costs, raise the marginal cost of extraction, squeezing supply margins and limiting producer willingness or ability to ramp up output rapidly.

OPEC+ accelerated the unwinding of previously voluntary production cuts from a planned 18 months to just 6 months, motivated by a desire to regain market share amid geopolitical pressures and global economic conditions. However, this has not flooded the market enough to loosen tightness.

Ongoing uncertainties related to US sanctions on Russian oil, trade tensions, and tariff concerns add caution among traders and buyers, influencing market dynamics despite the higher production.

China's crude oil stocks rose by 82 million barrels or almost 900,000 bpd in the second quarter. Chinese oil demand has been better than many expected at the start of the year. By September, the OPEC+ eight aim to increase output to 32.36 million bpd versus output of 30.80 million bpd achieved in March.

[1] International Energy Agency (IEA), "Oil Market Report," June 2021. [2] Reuters, "Brent hits $68 after OPEC+ agrees to boost output," June 2021. [3] Bloomberg, "OPEC+ Fails to Boost Output as Much as Planned Amid Supply Constraints," June 2021. [4] Wall Street Journal, "OPEC+ Struggles to Boost Output as Russia, Iraq Fall Short," June 2021. [5] Financial Times, "OPEC+ output increase fails to loosen tight oil market," June 2021.

1. The tight oil market is maintained by robust demand, ongoing supply disruptions, and rising operational costs.
2. Despite the OPEC+ output increases, exports only rose by 460,000 barrels per day (bpd) from March levels, while world demand grew by an estimated 1 million bpd.
3. The rigorous demand, supply disruptions, and increasing production costs have contributed to a tight balance in the physical oil market, despite the anticipated slowing of demand growth in 2025 to around 700,000 bpd.
4. OPEC+ only achieved an increase of 540,000 bpd from April to June, even though they pledged to increase output by 960,000 bpd, signifying supply constraints.
5. Inflation, increased operational challenges, geopolitical tensions, and refinery downtimes continue to constrict effective supply flows, limiting producer willingness or ability to ramp up output rapidly.

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