Posthaste: What happens when OPEC+ messes with the global oil market in a world weakened by tariffs

A flame torch burns at a refinery in France. Oil prices are plunging this morning after OPEC+ agreed over the weekend to release more oil into a world. Photo by JEAN-SEBASTIEN EVRARD/AFP/Getty Images

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Oil prices are plunging this morning after OPEC+ agreed over the weekend to release more oil into a world where the global economy and demand are threatened by Donald Trump’s tariffs.

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The group — led by Saudi Arabia and Russia — announced it would increase output by 411,000 barrels per day from June, after a similar increase last month. Total hikes now amount to almost 1 million bpd, erasing much of the 2.2 million bpd cuts that had been in place since October 2022.

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This isn’t what the global oil alliance normally does. When prices are low their strategy has most often been to cut output to keep prices at around US$80 a barrel.

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Yet today the benchmark Brent crude fell as much as 4.6 per cent toward US$58 a barrel, while West Texas Intermediate dropped to US$56.

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Oil was already one of the worst performing commodities this year with Trump’s tariff war threatening to significantly slow global growth and energy demand. What has analysts puzzled is why OPEC+ would stoke the selloff with this policy pivot.

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The increase from OPEC+ “simply cannot be absorbed,” Ajay Parmar, director of oil analytics at ICIS told Bloomberg. “Demand growth is weak, particularly with the recent imposition of tariffs.”

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The favourite theory is that Saudi Arabia is punishing OPEC members who have not been toeing the line on agreed output cuts. The Saudis have taken on the brunt of production reductions while Kazakhstan and Iraq were often accused of not complying with their quotas.

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Oil prices dove last week after media reports that Saudi Arabia had briefed allies that it would no longer prop up the global oil market with its cuts.

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“One gets the sense that patience is running thin in Riyadh and, as we have argued before, it’s surely a case of when, not if, Saudi opens the taps,” said David Oxley, commodities economist with Capital Economics.

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“As the sharp production rise in April 2020 attests, the Kingdom has proved itself willing and able to move much further and faster to make a point.”

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Others argue the Saudis are trying to curry favour with Trump who is scheduled to travel to the Middle East later this month. The U.S. president has called on OPEC+ to increase production to help bring down energy prices.

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However, those lower prices could in turn cripple the U.S. shale oil industry which needs prices above US$40 to $50 to break even — and that doesn’t fit with Trump’s ‘Made in America’ energy policy.

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That also may be the Saudis’ motivation, pushing U.S. shale operators, which have accounted for most of the world’s oil production growth over the past 20 years, out of business.

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“The exact motive remains unclear. But the direction of oil prices is clearer than the reasons behind OPEC’s move,” said Ipek Ozkardeskaya, senior analyst of Swissquote Bank.