ES #135: Offsetting OPEC's Supply Growth

Energy Shots #135

At Saturday’s virtual meeting, the eight members of the OPEC+ ‘voluntary cut crew’ elected to bring forward another 411 kb/d production in increase in June, matching the group’s adjusted output for May 2025 for a combined adjustment of +822 kb/d.

Following Saturday’s meeting, Reuters cited anonymous sources as saying that OPEC+ intends to accelerate the return of all 2.2 MMb/d of voluntary cuts by November 2025 from an original plan for gradual increases through December 2026 in order to punish overproducing members.

The anonymous nature of the Reuters report and the rationale used to substantiate the accelerated production schedule warrants caution, as a complete unwind of 2.2 MMb/d over six months would more likely indicate the start of a Saudi-U.S. price war than efforts to control overproduction from members like Kazakhstan or Iraq.

While the odds that global demand can absorb all 2.2 MMb/d of voluntary cuts are low, the second half of today’s report shows that prevailing sentiment discounts the potential for brewing geopolitical disruption catalysts to drive net balance tightening despite the group’s confirmed 822 kb/d increase for May and June.

What Happened: OPEC+ May & June Adjustments

Saudi Arabia will lead fellow voluntary cut members with the largest increase in production relative to the group’s 2025/2026 output schedule released in March.

Global crude benchmarks’ recent retreat below the $60/bbl mark reflects market participants’ doubts that demand can absorb the group’s +822 kb/d supply adjustment.

Indeed, Saudi Arabian officials’ recent commentary about the Kingdom’s ambivalence to a prolonged period of depressed prices could indicate an escalation in Saudi efforts to a) punish overproducers and b) regain market share after hitting its lowest production since 2010.

However, cues from last week’s dialogue between U.S. and Iranian officials suggest crude market participants should consider a third scenario in which accelerated OPEC+ production provides the U.S. more operating margin to

1. Disrupt sanctioned Iranian and Venezuelan barrels,

2. Apply more economic pressure on China during trade negotiations, and

3. Reduce the potential for another wave of energy-driven inflation.

Geopolitical Disruption Catalysts

This third scenario requires a look at the impact of the Trump 1.0’s “Maximum Pressure Campaign” on sanctioned Venezuelan and Iranian production to determine if a concentrated enforcement effort could offset the Voluntary Cut Crew’s +822 kb/d production increase.

As visible in the chart below, combined Iranian and Venezuelan production suffered substantive losses from the start of President Trump’s first term in January 2017 to pre-COVID December 2019.

• Combined production fell 3.28 MMb/d between Jan ‘17 and Dec ‘19 (Trump 1.0)

• Combined production grew 1.85 MMb/d from Jan ‘21 to Dec ‘24 (Biden Admin)

Displaying month-on-month changes in combined Iranian and Venezuelan production more clearly shows that successful enforcement of a Maximum Pressure Campaign 2.0 could offset the May/June +822 kb/d OPEC+ output increase.

• The most severe sanctions packages against Iran and Venezuela arrived in late 2018 and early 2019. Between October 2018 and March 2019, combined Iranian/Venezuelan production fell over 1.5 MMb/d.

• Two of these months yielded declines of more than 400 kb/d (Oct ‘18: -423 kb/d; Mar ‘19: -480 kb/d).

• Month-on-month declines over the six month (Oct ‘18 - Mar ‘19) period averaged approximately -252 kb/d

The Threat of Secondary Sanctions

President Trump announced this week that buyers of sanctioned Iranian crude will be met with secondary sanctions.

• “ALERT: All purchases of Iranian Oil, or Petrochemical products, must stop, NOW! Any Country or person who buys ANY AMOUNT of OIL or PETROCHEMICALS from Iran will be subject to, immediately, Secondary Sanctions. They will not be allowed to do business with the United States of America in any way, shape, or form. Thank you for your attention to this matter, PRESIDENT DONALD J. TRUMP”

As noted in the May 1 Daily Market Update, secondary sanctions would almost exclusively affect China, the destination for 1.5 MMb/d of Iranian exports across 2024 and 1.7-1.8 MMb/d between Feb and Mar of 2025 (>90% of Iranian exports).

Indications that Chinese officials are beginning to quietly de-escalate trade measures against the U.S. suggest underappreciated odds for substantial disruptions to Iranian/Venezuelan exports that offset the supply impact of the Voluntary Cut Crew’s +822 kb/d.

Why: Iran and Venezuela will likely struggle to find alternative buyers should independent Chinese refiners turn to non-sanctioned barrels. Downside risks from secondary sanctions likely outweigh the benefit of discounted supplies.

See you next Sunday.

ES.

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