The decision on 3 May by eight OPEC+ countries to further boost oil supply indicates a shift in the cartel’s strategy towards defending its market share. In this edition of InFocus, Senior Economist GianLuigi Mandruzzato looks at the rationale for the OPEC+ decision and the implications for energy markets and the economy.
The surprising increase in oil supply by OPEC+ announced on 3 May indicates that the priorities of Saudi Arabia, the de facto leader of the cartel, are to: (i) regain market share and (ii) consolidate the relations with the Trump administration.
The resulting oil glut will push down prices and force producers with high extraction costs, such as US shale oil companies, to reduce supply. Over time, the market will rebalance, leading to a recovery in prices.
Global inflationary pressures are expected to moderate in 2025H2 on account of the OPEC+ pivot, but its impact will unwind next year. Reduced US shale oil extraction will limit the natural gas supply, pushing up gas prices. The decline in inflation due to the new OPEC+ strategy will therefore be limited in size and duration.
What’s behind the new OPEC+ strategy?
On 3 May, eight OPEC+ countries unveiled a further step to boost oil supply1. Starting in June, they will raise their output quotas by 0.41 million barrels per day (mbd) on top of increases implemented in April and May2.
Furthermore, OPEC+ is now expected to continue to increase supply at a faster pace than previously announced. If, in the coming months, output increases match that of June, the supply idled in November 2023 will return to the market much earlier than originally planned. The OPEC+ decision reflects a combination of external pressures and internal tensions and signals a shift in the cartel’s strategy that will have global economic implications.
Leading the change is Saudi Arabia, which has indicated a new willingness to tolerate lower oil prices. The move marks a departure from Riyadh’s longstanding focus on supporting oil prices through production cuts. That strategy proved ineffective as oil prices fell by about a quarter since November 2023. That was because high oil prices incentivised non-OPEC+ producers to increase supply, resulting in a shrinking OPEC+ market share (see Figure 1).
The decision may also reflect geopolitics. Many commentators noted the production increase could have been aimed at pleasing Washington ahead of President Trump’s visit to the Gulf. Increasing oil supply may be intended to show responsiveness to US administration concerns over high energy prices. Furthermore, lower oil prices could increase pressure on Russia to start talks to end the war in Ukraine.
Saudi Arabia’s new strategy is also targeting those OPEC+ members that have repeatedly breached their output quotas. Compliance has become a growing source of friction within the cartel. Kazakhstan, Iraq and the UAE have consistently produced above their agreed limits (see Figure 2). By raising overall output, OPEC+ is sending a signal that it expects adherence to the new limits and is prepared to impose de facto penalties on non-compliant members.
However, not all agreed quota increases will result in greater OPEC+ oil supply. If the three overproducing countries respected their quotas, by September OPEC+ oil supply could be only 1.2 mbd higher than in March3.
Economic implications of the OPEC+ strategy
If non-OPEC+ supply remains unchanged, the OPEC+ pivot will lead to an oil supply glut in the rest of 2025 and in 2026 (see Figure 3). According to the International Energy Agency (IEA) May Oil Market Report, oversupply was large in Q1 2025 and the amount of OPEC supply needed to balance demand will fall for several quarters reflecting moderate demand and rising supply from other producers.
Unsurprisingly, oil prices have fallen to a four-year low and downward pressure seems likely to continue, something that is likely to result in an eventual rebalancing of the oil market. Consider, for example, the US shale producers: according to the latest Kansas City Fed Energy Survey they need a WTI oil price of USD 65 per barrel (pb) to profitably drill a new well (see Figure 4). If oil prices stabilised around USD 55 pb they would likely reduce supply.
This suggests that WTI oil prices much lower than USD 60 pb are unlikely to last. As a result, the global disinflationary shock stemming from the OPEC+ pivot will likely peak in the second half of 2025 and will likely unwind next year (see Figure 5).
However, the fall in inflation will be limited by the reduced supply of US natural gas as the latter is often a by-product of shale oil extraction. The reduced export capacity of liquified natural gas (LNG) would be expected to push prices higher. The eurozone will be affected strongly: after reducing imports of Russian natural gas to a trickle, Europe relies on LNG for half of its external gas supply (see Figure 6) and in early 2025 it absorbed about 40% of total US LNG exports.
The cold 2024-25 winter pushed European natural gas inventories to a three-year low (see Figure 7). To return them to the target of 95% of capacity before next winter means that over the next six months EU natural gas imports will be 50% higher than in the last two years. The combination of increased demand from Europe when US supply is less abundant than previously assumed points to rising EU natural gas prices and, because of it, households energy bills, fertilisers and ultimately food prices.
Conclusions
The OPEC+ strategic pivot reflects the changed structure of the global oil market and the potential gains it sees from strong relations with the Trump administration amid an evolving geopolitical environment.
The resulting oil glut will keep downward pressure on prices, forcing a market rebalancing through reduced supply from high-cost producers. Over time, reduced US shale oil output will lead to a recovery of oil prices. Furthermore, reduced availability of US natural gas will limit the disinflationary impact of the new OPEC+’s strategy, most importantly in the eurozone.
1Saudi Arabia, and the United Arab Emirates (UAE). In November 2023, they voluntarily reduced their production quotas by a total 2.2mbd.
2Production quotas were raised by 0.14 mbd in April and by 0.41 in May.
3The estimated increase in production includes the 0.3 mbd boost to the UAE production quota agreed in December 2024. It also assumes that Iraq and Kazakhstan reduce production from the current levels to meet their quotas, partially offsetting the increases in other countries’ output.
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