Oil prices under pressure as OPEC+ increases production output

Oil prices under pressure as OPEC+ increases production output

Updated Tack:

Monday's closing bell saw a mixed bag for energy commodities. June's WTI crude oil (CLM25) dipped -1.99%, while June RBOB gasoline (RBM25) inched up 0.14%.

Crude oil and gasoline prices witnessed a rollercoaster ride on Monday, with crude plunging to a 3.5-week low due to concerns about a global crude oil glut. The reason? OPEC+ agreed to raise production levels and Saudi Arabia hinted at further boosts. The dollar's weakness and signs of strength in the US service sector prevented more significant losses in crude.

On the flip side, gasoline rebounded from a 3-week low, reporting modest gains after a fire was reported at Valero Energy's Benicia refinery in California, causing short-covering in gasoline futures.

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The dip in crude was due to fears of a global oil glut following OPEC+'s announced production increase of 411,000 bpd for June. To make matters worse, Saudi Arabia indicated that additional similar-size increases could follow, aimed at lowering oil prices and penalizing overproducing OPEC+ members like Kazakhstan and Iraq.

OPEC+ is embracing a subtle reversal of its 2-year production cut, aiming to restore a total of 2.2 million bpd by September 2026. The group originally planned to restore production between January and late 2025, but now it seems the cut won't fully recover until September 2026. OPEC's April crude production saw a decrease of -200,000 bpd to 27.24 million bpd.

Worries over the ongoing US-China trade war and its potential impact on global economic growth and energy demand are also causing anxiety for crude prices after President Trump announced no plans for talks with Chinese President Xi Jinping.

Positive global economic news, such as the unexpected +0.8 point rise in the US Apr ISM services index to 51.6, and the Eurozone's May Sentix investor confidence index climbing +11.4 to -8.1, offered support to crude prices.

Additional sanctions on Russian crude might tighten the global oil supply and boost crude prices. As per US Senator Graham, support is building for a bill that would impose "bone-crushing" new sanctions on Russia, including a 500% tariff on imports from countries buying Russian crude, and a ban on US citizens from buying Russian sovereign debt.

Following recent negotiations, the US and Iran may reach a deal over Iran's nuclear program. If an agreement is reached, the US might lift export restrictions on Iranian crude oil, flooding the global market and potentially depressing crude prices.

A reduction in crude oil stored on tankers globally is bullish for oil prices. As per Vortexa's data, crude oil stored on stationary tankers for at least 7 days dropped by -14% w/w to 79.84 million bbl in the week ending May 2.

Stronger crude demand in China, the world's largest crude importer, underpins oil prices. Reuters reported an increase in China's March crude imports to 12.1 million bpd, the highest since August 2023.

A decline in US crude oil inventories, lower gasoline and distillate inventories, and a moderate contraction in US oil rigs, as shown in the EIA report and Baker Hughes data, further support oil prices.

On the publication date, Rich Asplund had no direct or indirect positions in any securities mentioned in this article. All information and data provided are solely for informational purposes.

Insights:

• The current production increase by OPEC+ is part of a premeditated, gradual, and adaptable return of previously reduced output levels, addressing favorable market fundamentals (such as low oil inventories) while maintaining market stability, allowing for flexible modifications (Source: OPEC+, April 2025).
• The rise in production is a strategy aimed to pressure OPEC+ members like Kazakhstan and Iraq who have been overproducing, marking a shift from their earlier strategy of cutting output to support higher prices (Source: OPEC+, April 2025).
• The short-term impact of OPEC+'s production increase has caused downward pressure on oil prices, with WTI crude dropping more than 3% after the announcement (Source: Bloomberg, May 2025).
• Lower sustained prices, if below $55, could trigger a contraction in US production supply and significantly tighten the energy supply chain (Source: EIA, April 2025).

Adjusting Paragraphs:- Mixed energy market: Paragraph 1 – Introductory information about crude oil and gasoline settlements and their movements.- Causes of dips: Paragraph 2 – Explanation for the concern over a global oil glut, Saudi Arabia's signaled increase, weaker dollar, and US service sector strength.- Rebounding gasoline: Paragraph 3 – Discussion about the fire at Valero Energy's refinery causing short-covering in gasoline futures and modest gains.- OPEC+'s production hike impact: Paragraph 4 – Overview of OPEC+'s planned rollback of production cuts and the intent to maintain stability with flexibility.- Global economic news: Paragraph 5 – Positive economic news that supported crude prices.- Additional sanctions and Iran's nuclear program: Paragraph 6 – Discussion of the potential impact of increased sanctions on Russian crude and the US-Iran nuclear talks.- Crude oil reduction and Chinese demand: Paragraph 7 – Explanation of the reduction in crude oil stored on tankers and stronger crude demand in China.- Domestic factors supporting oil prices: Paragraph 8 – Information on the decline in US crude oil inventories, lower gasoline and distillate inventories, and a moderate drop in US oil rigs, supporting oil prices.

1. In light of the ongoing market fluctuations, discerning investors may find opportunities in the oil-and-gas sector, as OPEC+'s production hike adversely affects prices in the short term but could potentially foster profitable investments in the finance industry and the energy sector in the long run.
2. As the industry moves towards a gradual return of previously reduced output levels, savvy investors might consider diversifying their portfolios with investments in the oil-and-gas sector, particularly in companies that specialize in energy efficiency and renewable resources, to hedge against potential market volatility caused by factors such as geopolitical tensions and trade disputes.

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