Opec+ supply boost will bring oil prices down further, analysts say

Oil prices fell nearly 2 per cent on Tuesday after producers' group decided to ease supply cuts from April

Opec is currently holding back 5.86 million bpd from the market. EPA

Oil producers group Opec+'s decision to restore supply next month will add to an oil market glut expected this year, resulting in a decline in prices, experts say.

On Monday, the alliance of producers said it would proceed with a "gradual and flexible" unwinding of voluntary production cuts of 2.2 million barrels per day (bpd) starting on April 1, adding 138,000 bpd per month until September 2026. The planned return of production cuts – originally made by eight Opec+ members, including Saudi Arabia, Russia, the UAE, and Iraq in November 2023 – had been pushed back three times amid concerns about growing supply in the market.

Opec+ said that the increase could be halted or reversed if market conditions deteriorate.

“On net, this development has not changed our bearish oil price thesis as we had already thought Opec+ supply would return by the second quarter – exacerbating what is set to be an oversupplied market this year,” MUFG said in a research note.

An oil market surplus of more than 900,000 bpd, alongside an elevated spare capacity of 5.5 million bpd, should drive the “rebalancing” of oil prices, the bank said. MUFG expects Brent prices to average $69 a barrel in the second quarter of 2025 and $73 a barrel for the full year.

Brent, the benchmark for two-thirds of the world’s oil, was trading 1.82 per cent lower at $70.32 a barrel at 4.33pm UAE time following Opec+’s decision and investor concerns about the impact of US tariffs on crude demand growth.

A planned 25 per cent US tariff on Mexican and Canadian goods went into effect on Tuesday, alongside an additional 10 per cent duty on Chinese imports. Canada and Mexico are two of the largest crude suppliers to the US market. Oil exports from Canada are to have a lower tariff of 10 per cent. Last week, media reports suggested Opec+ could delay plans to increase production due to uncertainty about the impact of tariffs and US sanctions on Venezuela, Iran and Russia.

“A fourth postponement would have needed exceptionally bearish market conditions, which is not the case,” said Vandana Hari, the founder of the consultancy Vanda Insights. “Yes, crude is under pressure from the US’s tariff wars as they can slow down economies, but it would be a mistake to assume the conflicts will drag on,” Ms Hari told The National.

“Trump is using the duties as tools to extract the agreements he wants … on stemming the flow of illicit drugs into the US. It would be premature to assume a full-on, all-out trade war.”

Opec+ is currently holding back 5.86 million bpd from the market as part of a series of production cuts made since 2022, representing 5.6 per cent of current global oil supply. On Monday, the eight member countries also reaffirmed their commitment to voluntary production adjustments and pledged to fully compensate for overproduction since the beginning of 2024 by June next year.

"By bringing forward the compensation cuts of past overproduction of some Opec+ member states, we think the effective production increase will be smaller than the announced 138,000 bpd," said Giovanni Staunovo, a strategist at UBS. "There is no indication that the group is fighting for market share; rather, we believe the group is focused on supply management to keep the oil market in balance," he added.

However, phasing barrels back in to markets to establish a large base load level of Opec+ production "could be a shift in strategy to preserving market share and away from targeting specific price levels", Dubai bank Emirates NBD said in a note. The bank expects Brent prices to average $70 a barrel in the fourth quarter as global inventories build over the year due to higher production.

“Downside risks may grow more material if a global trade war widens and shipping has to re-orient to shorter, more regional routes or exporters forgo shipments entirely,” the lender said. “Diplomatic efforts to reintegrate Russia into unrestricted commodities trade also represents another downside risk for oil and commodity prices in 2025."

The International Energy Agency expects global oil supply to rise by 1.6 million bpd to 104.5 million bpd this year, while global oil demand growth is projected to average 1.1 million bpd.