- OPEC’s cautious supply return strategy is being seen by many as a price war, but it aims more to balance long-term market share and avoid severe budget impacts than to sharply undercut prices.
- Oil market uncertainty persists, with forecasts split between declining demand due to EVs and energy transition, and potential demand growth driven by Asia and existing consumption needs.
- Investment concerns loom, as OPEC warns of a $17.4 trillion gap in oil and gas spending over 25 years.
In the past, wars were short, sharp and, to those who profited from them, sweet. Now, an oil price war is a more cautious affair—assuming what OPEC is doing with its supply return is a price war, of course. And because most assume just that, all eyes are on the group’s chances of success. These are uncertain, to say the least, with most demand forecasts predicting a disaster for prices.
OPEC and its friends from OPEC+ decided to start returning 411,000 barrels daily to the global oil market in May. Since then, they have agreed to two more production boosts of the same size. Interpretations of their motives for that have hogged headlines since the first announcement shocked oil traders who had expected a supply boost of less than 150,000 bpd for May. But in case anyone’s been following actual prices, these rose.
Leaving aside the latest surge in prices prompted by Israel’s attack on Iranian nuclear facilities this week, oil price movements since the original OPEC announcement about the supply return have been ambivalent, to put it mildly. Yes, the production boost pressured benchmarks, in turn pressuring higher-cost U.S. shale producers. Yes, it brought additional supply to a market that is claimed to be already oversupplied—but these claims need physical demand data confirmation and they might not get it. More importantly, supply security over the long term is thinning due to falling investments.
It was OPEC yet again that warned about the dangers of lower investments in new oil and gas exploration. Secretary-General Haitham Al Ghais said this week that global investment needs for new oil and gas stand at $17.4 trillion for the next 25 years. For comparison’s sake, the investment needed for achieving a net-zero global economy has been calculated at $110 trillion for the period between 2021 and 2050 but in the past three years the price tag has repeatedly been revised upwards.
Meanwhile, the Wall Street Journal writes that OPEC’s strategy of returning supply to the market could tip that market into a surplus of some 1 million barrels daily, set to grow to 1.5 million barrels daily in 2026, according to Goldman Sachs—bar a new war in the Middle East, of course.
This is, of course, bad news for shale drillers who face higher costs than Saudi Aramco, which, per that WSJ report, can break even at $35 per barrel. Yet Aramco’s majority owner cannot break even budget-wise at $35 per barrel. Because it has expensive plans for economic diversification. In fact, according to the International Monetary Fund, Riyadh needs $92 per barrel to break even. Per most authors of analysis regarding OPEC and OPEC+ policy, this is not going to happen anytime soon—unless, war.
Indeed, most media can’t go a week without publishing a grim outlook on oil demand, painting a picture of excess barrels and tanking prices because the world has moved on to EVs and energy efficiency. The latest comes from Bloomberg’s opinion column, where David Fickling argues that “As electric vehicles take more market share and climate damage grows,” global oil production is about to start declining, never returning to 2018 levels.
It’s peak oil all over again but this time the reference point is 2018 instead of 2019—which production was never going to return to as well, according to none other than BP’s former CEO who embraced the energy transition.
We all know how that embrace ended.
Now, it is quite possible that world oil production will indeed not return to 2018 levels. It is also possible that oil demand surprises on the upside, as it has done before. And then there is the question of supply maintenance—because even if oil demand is done growing ever more, supply needs to be maintained to satisfy the already existing demand. This is what OPEC is banking on over the longer term. It’s that and Asian economic growth, which invariably leads to higher oil—and gas—demand.
The Wall Street Journal is right in noting that this price war is a cautious one. It would be nice to have less competition from the U.S. shale patch but it would be even nicer to grab a bigger market share with a view to long-term demand coverage—which is why OPEC is not actively trying to really tank prices. That, and it doesn’t really want to face the budget consequences, which will be rather severe.
The outlook for oil demand started getting uncertain when the energy transition got underway. Some staunchly believe it is unstoppable and irreversible. Parts of it certainly are—China is not going back to the smog years. But there are limits to how much you can change in energy, as evidenced by the fact that China is once again building new coal power plants at a faster rate than last year—despite its record wind and solar capacity. Meanwhile, new oil and gas discoveries are getting sparser and sparser. Perhaps OPEC has learned to wait and play the long game.