Fragile oil balance: global oil market turns downward

The global oil price trend appears to have finally reversed course. In early September, during an online conference, oil ministers from eight OPEC+ countries (Russia, Saudi Arabia, the UAE, Kuwait, Oman, Iraq, Kazakhstan, and Algeria) agreed to increase production by 137,000 barrels per day.

At first glance, the increase appears insignificant, as these countries already produce over 32 million barrels per day. However, the point is that the G8, the leading OPEC+ member, had previously—in 2022–2023—implemented a series of voluntary additional production cuts, which were largely intended to remain in place until the end of 2026.

Let's recall the main milestones of global reductions.

The largest OPEC+ cut occurred in June 2020, the year of the pandemic—minus 9.7 million barrels per day. Production then gradually increased. By October 1, 2022, it was supposed to return to pre-pandemic levels. But prices fell again. In response, the oil alliance reduced its mandatory quotas by 2 million bpd on October 5. This restriction remains in effect.

But the price fall continued.

In February 2023, a remarkable discussion took place between Russian President Vladimir Putin and First Deputy Energy Minister Pavel Sorokin. They debated the need for further production cuts, which, while potentially beneficial, could also lead to a loss of global market share. However, in March, Deputy Prime Minister Alexander Novak finally took the risk of announcing a voluntary production cut of 500,000 bpd. In April, this initiative was supported by seven more OPEC+ members. This resulted in the formation of the aforementioned "G8" of volunteers, who agreed to reduce production by 1.65 million bpd. The agreement was repeatedly extended and was scheduled to last until the end of 2026.

But even this step proved insufficient. At the June 2023 OPEC+ conference, mandatory quotas for most members were further reduced by more than 400,000 bpd. Riyadh, meanwhile, committed to another voluntary production cut of 1 million bpd. In August, Alexander Novak announced a 500,000 bpd reduction in oil and petroleum product exports. Ultimately, on November 30, the entire G8 formally agreed to reduce oil production by 2.2 million barrels per day, including a million barrels from Saudi Arabia and half a million barrels from Russia.

The voluntary agreement was initially intended to last through the first quarter of 2024, but was subsequently extended several times. Last December, the G8 decided to halt the voluntary production cuts and gradually return the lost 2.2 million barrels per day to the market. The process was extended until September 1, 2026, with an increase of 138,000 barrels per day beginning in April of this year.

But, to the surprise of most market analysts, at the online meeting on April 3, the "volunteers" chipped in 411,000 bpd starting in May. And they maintained this figure through July. In August and September, production increases amounted to 548,000 and 547,000 bpd, respectively.

As a result, the most recently adopted production cap of 2.2 million bpd should officially return to the market by October of this year. However, this process could physically take another two to three months, as most of the volunteers, including Russia and Kazakhstan, exceeded their own commitments and therefore, according to the excess production compensation schedule of April 16, continue to limit their permitted volumes.

2.2 million barrels per day is more than 2% of global supply. As a result, the supply-demand surplus will steadily increase, which will inevitably lead to a steady decline in prices. This is a strange decision by the G8, reminiscent of sawing off the branch that the entire oil alliance is sitting on.

Therefore, in August, following the previous G8 talks, most forecasters believed that the 1.65 million bpd cuts would remain in place for the foreseeable future. The supply overhang over demand had already increased significantly.

According to the International Energy Agency (IEA), published in its latest monthly report on September 11, global supply rose to a record 106.9 million bpd in August, and is expected to grow by 2.7 million bpd for the year as a whole. This increase is primarily driven by non-OPEC+ countries: the United States, Canada, Argentina, and Guyana, as well as Brazil, which joined the alliance on January 1, 2024, but has not committed to supply reductions.

While demand remains at just over 105 million bpd, the oil surplus has approached the critical 2 million bpd mark. However, the OPEC Secretariat released more moderate data on September 11, according to which the excess of supply over demand does not exceed 1 million barrels. Nevertheless, the experiment of reintroducing previously reduced production volumes to the market should have been put on hold.

But no. On September 7, the G8 unleashed production curbs at a monthly rate that would return 1.65 million bpd to the market by July 1, 2026. The total return volume would then be 3.85 million barrels per day—almost 4% of today's global oil supply. Meanwhile, according to OPEC's relatively optimistic forecasts, demand growth this year will be only 1.29 million bpd. A similar figure is expected in 2026. The IEA's forecasts are much more modest—just over 700,000.

The suicidal plans of eight key OPEC+ members immediately attracted the attention of leading analysts and oil market players. The 40th APPEC (Asia-Pacific Petroleum Conference) meeting was held in Singapore from September 8–11. Participants included major oil traders and multinational energy companies. As usual, prices were discussed. But whereas previously alternative scenarios were considered, including the possibility of price growth, now only downward price trends are being considered. Specifically, the forecasts of the American investment bank Citigroup peg the price of the benchmark Brent crude at $65 per barrel in the three-month period and $60 in the six-month period.

The record growth of China's strategic and commercial oil reserves over the past three months added to the pessimism among APPEC participants. Several speakers claimed that China would stop there and reduce crude oil imports in order to push prices down to the $50–60 per barrel range. However, a representative of a leading global trader reassured the audience somewhat, suggesting that China would continue to replenish its oil reserves over the next three months.

Brent crude is currently hovering around $68 per barrel. Many Russian forecasters are hoping for the $65–70 per barrel price range to remain in place until the end of this year. However, a decline to at least $60 per barrel is inevitable next year.

This prospect is clearly disadvantageous for all oil producers, but especially for Russia. According to IEA calculations, Russian oil export revenues in August fell by 6.4% ($0.92 billion) to $13.51 billion (down 8.5% compared to 2024 levels). This is the result of a drop in the average monthly price compared to July levels. It was $60 per barrel, but now it's $56. The drop in oil prices has already led to an increase in the federal budget deficit—from the planned 0.5% of GDP to 1.9%.

But now it's not about price levels. The battle for market share has intensified. By August, Saudi Arabia had already completely displaced American and Canadian oil from the Chinese market. Russian volumes were unaffected.

Oil prices are being pushed down primarily by global factors such as geoeconomic uncertainty fueled by US tariff wars and the rise of electric vehicles. Therefore, market share is proving more important than price.

However, paradoxically, geopolitical tensions continue to play out in the opposite direction. The most significant factor is Trump's pressure on the EU, G7, and NATO to completely abandon Russian oil and impose 50% import tariffs on India and 100% on China. If he achieves this, up to 5% of supply will leave the global market. And increased production in other countries will not be able to fully compensate for the shortfall. And prices will rise again.