"Even with More Production, Output Won't Rise"... OPEC+ Hamstrung by the Strait of Hormuz

[Financial News, New York = Lee Byung-chul, correspondent] The seven core countries of the Organization of the Petroleum Exporting Countries (OPEC) and OPEC Plus (OPEC+), the alliance of major oil producers, have begun their final round of output increases to fully unwind the voluntary production cuts that have been in place since 2023. Yet global oil prices are showing little sign of stabilizing. Although they agreed to add 188,000 barrels per day from September, the actual boost in supply is expected to be limited because of the Middle East war surrounding the Strait of Hormuz and the Russia-Ukraine war. Analysts say the era in which geopolitics, rather than supply policy, determines oil prices is now taking hold. Against this backdrop, global oil prices fell more than 4% after U.S. President Donald Trump said he would abandon plans to attack Iran and move toward negotiations.

Saudi Arabia, Russia, Iraq, Kuwait, Algeria, Kazakhstan and Oman, the seven core OPEC+ countries, agreed in a video conference on the 2nd (local time) to raise production by 188,000 barrels per day starting in September. With that decision, the voluntary cuts totaling 1.65 million barrels per day agreed in 2023 have now been fully reversed. In a statement, OPEC+ said the move would create an opportunity to accelerate compliance with compensation for past overproduction.
The problem is that the increase does not translate into an equivalent rise in actual supply. Because the Iran war and the Russia-Ukraine war have repeatedly disrupted crude exports from the Persian Gulf region, Russia and Kazakhstan, most of OPEC+'s monthly output increases this year have amounted to little more than a paper increase in production quotas rather than a real expansion in market supply.
Crude shipments through the Strait of Hormuz have also yet to return to normal. Trump had set the reopening of the strait and a reduction in Iran's nuclear program as conditions, but Iran denounced that as a threat and reaffirmed its defensive posture. With shipping insurance costs and operational risks remaining high, tanker operators are also taking a cautious stance on resuming normal operations until negotiations are fully concluded and safety is verified. Brent crude surged intraday to as high as $126.41 per barrel in late April, when the Middle East conflict intensified, underscoring how geopolitical risk, not supply, can drive prices.
Against this backdrop, OPEC+ is likely to pause any additional production increases in the fourth quarter after September. Reuters and CNBC, citing multiple OPEC+ sources, reported that the group is considering a temporary halt to further output hikes through the end of the year after September.
Jorge León, head of geopolitical analysis at Rystad Energy, told Reuters, "Now that OPEC+ has completed the rollback of its voluntary cuts, it has entered a phase of managing the potential supply glut that could emerge once exports normalize." He added, "It is likely to pause output increases in the fourth quarter and focus on negotiations over 2027 production quotas."

The wide divergence in oil price forecasts among institutions after this decision also reflects how much geopolitical risk each one is factoring in.
In a bullish scenario, where the reopening of the Strait of Hormuz is delayed again or a ceasefire collapses, global oil prices could climb back above $100 per barrel. Goldman Sachs said Brent could rise above $120 if disruptions to traffic through the strait persist for an extended period. The International Energy Agency (IEA) also warned that if disruptions to Middle East oil production and exports continue for a long time, the decline in global crude inventories could deepen and intensify supply shortage pressures.
By contrast, in a baseline scenario in which Middle East oil production and transport gradually normalize, prices are likely to stabilize lower. The U.S. Energy Information Administration (EIA) projected that Brent crude would fall to an average of around $70 per barrel in the fourth quarter of this year, assuming a recovery in Middle East output and a buildup in global inventories. Goldman Sachs also put its fourth-quarter Brent forecast at around $80, assuming tensions ease.
The possibility of a "supply glut after exports normalize," which León mentioned earlier, is already beginning to be reflected in the market. After Trump said he had withdrawn plans for a military strike on Iran, global oil prices plunged more than 4% in a single day. Trump explained that he had put the attack on hold because a broad framework for talks had been established at the request of Iran and other Middle Eastern countries, and the geopolitical risk premium in the Middle East quickly narrowed.
Still, a supply glut is unlikely to materialize immediately. Even if crude exports return to normal, oil producers will need time to expand output and restore logistics. Market watchers say a supply glut is more likely to emerge as a new variable only after the Strait of Hormuz is fully reopened and Middle East oil exports are back on track.


[email protected] Lee Byung-chul, correspondent Reporter