The recent global trade war, initiated by US tariffs, may inadvertently benefit OPEC. While oil prices initially tumbled on fears of a global economic slowdown, OPEC swiftly responded with a strategic production increase.
While President Trump's tariffs exempted oil and gas, the market still reacted negatively, fearing reduced demand from major consumers like the US and emerging Asian economies (China, Vietnam, Bangladesh, Thailand, Indonesia, Taiwan, India, Malaysia), who face substantial tariffs. JP Morgan raised the probability of a global recession.
OPEC+ surprised the market by tripling its planned production increase for participating countries to 411,000 barrels per day, signaling resolve in addressing non-compliance.
This decision targets two key issues:
- Non-Compliance: OPEC+ is pushing nations like Iraq and Kazakhstan to adhere to production quotas. These countries are struggling with internal issues (Iraq's Kurdish oil disputes) or expansion plans (Kazakhstan's Tengiz field expansion, complicated by Russian pipeline restrictions). Russia is using pipeline maintenance as leverage over Kazakhstan's compliance.
- US Shale Industry: The trade war presents challenges for the US shale industry, already facing headwinds from consolidation, shareholder pressure, and maturing fields. Tariffs raise costs for key materials like drill pipes, and retaliatory tariffs from China will limit US oil exports. Exempting oil from tariffs hurts the US upstream industry, as it has to compete with cheaper imports.
By increasing production, OPEC+ puts pressure on non-compliant members and creates a more challenging environment for US shale producers, while simultaneously accommodating US requests for increased output. OPEC+ is taking control of the oil market narrative amidst global economic uncertainty, demonstrating its ability to adapt and assert its influence.