On Saturday, OPEC+ announced a 411,000 barrel per day increase in crude oil production targets for June, following an identical increase in May’s target.
This second increase, nearly triple the increase schedule announced earlier this year, sent crude oil prices down by more than 3% over the weekend, with West Texas Intermediate briefly dipping below $56.
While lower oil prices often translate to lower gasoline prices, the recent decoupling between oil and gas prices shows there’s more at play. Consider two key pieces of context:
- OPEC+ is doing more than increasing production faster than planned. The cartel, in a departure from its recent strategy of cutting output to keep prices higher, signaled that it is willing to drive prices lower to pressure cartel members like Kazakhstan and Iraq, which have been exceeding their production quotas.
- OPEC+’s production targets still only reflect expected production. Actual production totals have decreased in the past two months, including in April, when production decreased by 200,000 barrels a day compared to the planned increase of 138,000. Only time will tell if these production increases for May and June materialize as planned, or if the threat of lower oil prices is enough to rein in the overproducing countries.
Significant uncertainty remains in oil prices, and it will be important to follow both OPEC+ and U.S. producers to see the ultimate impact.
U.S. producers are planning their output for the coming years. Sustained prices around $60 will most likely put many oil companies into “maintenance mode” with minimal production growth, while sustained prices below $55 are likely to drive a contraction in supply, which would have a significant effect on the energy supply chain.
Read more of RSM’s insights on the oil markets and the energy industry.
