OPEC+ Makes a Big Bet on Oil Demand

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1:54Joumanna Bercetche:Podcasts. Radio. News. This week, oil executives and officials from some of the world's largest oil producers, countries like Saudi Arabia and Nigeria, are gathering in Vienna, where OPEC, the Organization of the Petroleum Exporting Countries, is headquartered. And the purpose is to bring together some of the biggest players in the space. Bloomberg's Germana Brasechi is in Vienna covering OPEC's gathering. And given what's been happening recently, there is a lot for the group to discuss. Remember, we are coming off the most volatile period for oil in the last couple of years. We're coming on the air with breaking news.

2:32Israel has just launched airstrikes into Iran.

2:35Joumanna Bercetche:Massive precision strikes on the three key nuclear facilities in the Iranian regime. After that 12-day war between Iran and Israel, we saw a massive geopolitical premium get priced into the oil curve. And here we are, pretty much all of that geopolitical premium was wiped out, coming on the heels of another big OPEC-plus decision. OPEC-plus, which includes even more oil-producing countries, made a surprise move over the weekend. It announced plans to boost oil production by more than half a million barrels a day. A big production increase at a time when investors are worried about oversupply. Now, the world's largest oil producers are at a crossroads.

3:17And what happens next could ripple through the global economy.

3:23I'm David Gurra, and this is The Big Take from Bloomberg News. Today on the show, what OPEC Plus's production surge says about the influence it has on oil markets today. We look at what motivated the alliance's latest move, what it means for markets, and who actually calls the shots in the multi-trillion dollar oil industry.

3:45The Organization of the Petroleum Exporting Countries is a coalition that dates back to the 1960s. At first, its membership consisted mostly of Gulf states like Iran, Iraq, and Saudi Arabia. But over the years, its ranks have expanded to include countries like Ecuador, Indonesia, and Nigeria. And about a decade ago, an alliance called OPEC Plus formed, which includes an additional 10 oil producers, including Russia and Kazakhstan.

4:13Joumanna Bercetche:The purpose is to coordinate oil production policy around the world, to keep prices stable, and to ensure that you're both maximizing potential revenue for producers, but at the same time, keeping prices affordable for consumers. For years, OPEC was the major player in the global oil market, but it doesn't have as much influence as it used to. The United States has become a major player after it ramped up the extraction of shale oil through a process known as fracking. The U.S. is now the largest oil producer in the world, and notably, it is not a member of OPEC or OPEC+. So as it stands today, OPEC +, their decisions still matter hugely, but of course they're not the only game in town.

4:58Still, what these countries decide to do when it comes to how much oil they produce can send shockwaves through the global economy. That happened back in 2023, when OPEC Plus decided to cut production by an additional 1 million barrels a day. The cuts were meant to rebalance the global oil supply. Crude prices had fallen, and analysts were predicting a glut ahead.

5:21Joumanna Bercetche:And therefore, they took the decision to withhold barrels, i.e. to withhold production from the markets. and so-called these voluntary cuts, because then a group of eight producers started withholding production from the market per an agreed schedule. And the whole purpose of that was to introduce again some price stability. Initially, those cuts were meant to be around for, say, six months or so. They kept getting extended. But then at the beginning of this year, so around spring of 2025, they announced that they were going to start slowly unwinding the cuts that were introduced in 2023. In other words, OPEC Plus was shifting course and boosting production again.

6:02Joumanna Bercetche:The plan was to do it gradually, bringing back slowly, slowly, a little bit more than 130 ,000 barrels a day. But what has happened in the last four months, they've accelerated the putback. So from May, June, July, they surprised the market by increasing monthly production by more than 400 ,000 barrels per day. That's three times the volume initially scheduled in those first three months. Jumana says there are a number of reasons for the recent surge in production. Among them, a desire by OPEC's most powerful member, Saudi Arabia, to punish members like Kazakhstan and Iraq, which exceeded their quotas.

6:39Then there's the growing influence of non-OPEC producers.

6:43Joumanna Bercetche:You're seeing a huge pickup in supply from the likes of Canada, Brazil, Guyana. So there are non-OPEC countries bringing their extra production to the market. And that's obviously got to be a concern for OPEC from a market share perspective. So when analysts were analyzing this decision and trying to, you know, put together the rationale for why OPEC plus decided to accelerate the unwinds of these voluntary cuts, one of the clear rationals was because they felt that they were one, losing market share. Two, of course, they felt that the market could handle it. And then three, and this probably isn't something that they would say explicitly, But of course, you do have a president in the White House who repeatedly talks about his desire to see lower oil prices.

7:27And I'm also going to ask Saudi Arabia and OPEC to bring down the cost of oil. You got to bring it down.

7:33Joumanna Bercetche:And perhaps they sense an opportunity both politically and economically to put more barrels back into the market, but also appease the United States. Let me stick with that for a second. And so as you say, it's no secret that President Trump wants low oil prices, and he's been pressuring OPEC to slash prices for months now. He met with OPEC leadership on his recent tour of the Persian Gulf. To what degree was this a direct response to that? Of course, the U.S. is not a party of OPEC or OPEC+. How much influence does the U.S. have, and how much is this attributable to what the president's been saying?

8:06Joumanna Bercetche:They will not tell you directly, but for sure they're going to be motivated and influenced by the U.S. and by a very vocal president sitting in the White House. But then also don't forget that if prices go too low, then that also backfires on some of the drillers and the U.S. producers as well. Because already, if you look at, say, the rig counts, the active oil rig counts in the U.S. this year, they're back down to lows not seen since September 2021. And why is that the case? Because oil prices are lower. And so if you think about it from OPEC Plus's perspective, maybe they're willing to tolerate lower prices if that also means that they're building market share and they are reducing the ability of some of their big competitors in the U.S., these shale drillers, to also bring production to the market.

8:56So OPEC Plus seems willing to deal with lower oil prices. And this weekend's decision confirms that. Their members gathered on a video conference call. And it didn't take long for them to announce that in August, they will add 548 ,000 barrels of oil to the market every day.

9:13Joumanna Bercetche:It was a 10-minute meeting, so it was fairly quick. Every one of those members who were part of the voluntary cutting group were in unanimous support of this decision. There really seems to be a desire to get these barrels back to the market. Now, their justification at the time when they put out the statement on Saturday, they said that the market fundamentals support it. They spoke about lower inventory. It seems as though OPEC +, the voluntary cutters, did see a window of opportunity here to bring back those extra barrels to the market without upsetting oil prices too much. And actually, if you look at the price reaction, say, in Brent on Monday, it barely dipped.

9:56Joumanna Bercetche:We're down about half a percent and actually we're higher on the week now since they made this decision, which does tell you that perhaps to a certain extent the market was ready to absorb these extra barrels. But then, of course, the question becomes, this is now. What happens in a couple of months' time once the seasonal demand drivers are out of the way? That OPEC Plus news broke on Saturday. And on Sunday, global markets were surprised again by another move, this one by OPEC's most powerful member and the world's second largest oil producing nation, Saudi Arabia. We dig into that after the break.

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13:37Joumanna Bercetche:That was a bit surprising and does actually reflect the fact that Aramco do see healthy demands coming from those parts of the world. And for Saudi Arabia, their biggest buyers coming from the East and coming from Asia, that was actually quite notable. And I will tell you, I've spoken recently to the Aramco CEO, to Amin Nasser, before the OPEN plus decision, before the Iran-Israel war even. And he was saying that he actually does see the market as pretty, pretty balanced. They still see healthy signals coming through from Asia, despite the naysayers there and the fact that many in the industry seem to think that demand from China will be leveling off as there's been more of a push towards electric vehicles.

14:19Joumanna Bercetche:But the signals that Aramco seem to be picking up are strong. Otherwise, they would not have been able to push through those extra price hikes. So that is quite notable. I wonder if anything stood out to you from that conversation just about his perspective on the global oil market, his confidence, I suppose, in there being buyers for oil going forward. One thing that I learned was he said that because they're sitting on three million barrels a day of extra capacity, so spare capacity, every one million provides a cushion for a$10 drop in the price of oil, which is quite notable from a revenue perspective.

14:57Joumanna Bercetche:Other companies do not have that to cushion any drop in prices. For us, we do have that spare capacity that is healthy, strong. What he was trying to say is Saudi Arabia, Aramco, can actually stomach slightly lower prices given how much spare capacity that they're sitting on. They'll just pump more, but at lower prices. So net-net, from their perspective, it sort of adds up. Other producers do not have that additional barrels to put in the market. We do have that additional barrels, and it gives us strong benefit in terms of impact on our net income. My sense was that Wall Street's expectation is there's going to be a surplus of oil here in the second half of this year.

15:46Maybe a dumb question, but where does Saudi Arabia, where do these other producers think that the market for this oil is going to be? How confident are they that they're going to be buyers for all of the soil that they're producing?

15:55Joumanna Bercetche:As of now, they seem to be pretty confident. Unclear how this is all going to pan out in a couple of months' time. So this is a time of year where the seasonals do work in their favor. You have global refineries operating at very high intensity, but that's expected to subside by the end of the summer. You have high energy demands coming out of some of these Gulf nations because of the heat at this time of the year, you know, operating air conditioning units. You have high demand for transport fuel out of some of these Western nations. So once the seasonals are out of the way, then you want to see what happens to demand.

16:29Joumanna Bercetche:It's a question of whether also some of the macro uncertainties in the air, things related to tariffs, the global economy, to China demand, the incremental fiscal boost that you're going to get from some of these big packages that have been announced, whether all of that is going to move the needle on demand as well. Those are things that you want to think about. let's say you get a nuclear deal between US and Iran. Does that mean you get a reduction in sanctions? Does that mean that this mantra of maximum pressure will be released and therefore Iranian oil, which by the way, hasn't taken a big production hit, I should note, will be freer to be sold to all of these other willing buyers around the world as well.

17:10Joumanna Bercetche:So these are questions that we just don't know. But you mentioned Wall Street being pretty bearish and it's exactly because of that. And the likes of Goldman, for example, see supply growing at four times the speed of demand over the next three to four quarters. And on the back of that, the likes of JP Morgan, Citi are pretty bearish on where the price of Brent gets to. And most of them have their forecast around$65,$60 by the end of this year. OPEC Plus has its next meeting on August 3rd. Jumana says she'll be watching for a few things. Namely, will the group stay the course? Will it effectively get oil production back to where it was before it imposed those cuts in 2023.

17:50Joumanna Bercetche:The other thing to watch out for always compliance, whether or not some of those big producers, the ones that have been overproducing, will start cutting back. Ultimately, for the cohesion of the group, though, all of these different countries, these producers want to be producing as much as they possibly can with prices as high as they possibly can. Right. And so this is the paradox for OPEC. They're trying to keep prices stable, but they also want to grab onto market share. This is an environment where they have a lot more competition than they've ever had in history.

18:29This is The Big Take from Bloomberg News. I'm David Gurra. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you like this episode, make sure to follow and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.

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