“There is no peak in oil demand on the horizon,” the head of OPEC, Haitham al Ghais, said last month in Canada. Demand will continue to increase as global population grows, he added. And OPEC will be there to respond with what supply is necessary. OPEC is now playing the long game.
Fast-forward a month and Reuters is reporting on “signs of strong demand more than offset the impact of a higher-than-expected OPEC+ output hike for August”, not to mention now chronic worry about Trump’s tariffs. In fact, after OPEC+ announced the bigger than expected supply boost, prices rose, not least because not everyone boosting supply was boosting it fast enough.
When OPEC+ first said they were going to start unwinding their production cuts, agreed back in 2022, reactions were varied. Some argued it was all about trying to kill U.S. shale again. Others said the Saudis, the biggest cutter, simply had no other choice any longer after the cuts failed to produce significantly higher prices. Yet others claimed OPEC in general and Saudi Arabia specifically are trying to please Trump—by hurting some of his biggest donors. OPEC itself has not endorsed any of these versions of events.
The fact remains that OPEC is reversing the cuts, boosting oil supply—but prices are not tanking as so many prominent energy analysts said they would, and are still saying they would, later this year. Of course, this is because of factors unrelated to OPEC, namely geopolitical developments such as U.S.-Chinese trade talks and Canadian wildfires, as well as yet more EU sanctions against Russia. But OPEC certainly wouldn’t mind these factors supporting prices, if not more U.S. rig additions.
OPEC is playing for market share. This is one of the most popular explanations for the group’s latest moves among analysts. After curbing production for a couple of years and surrendering market share in the process, now some of the world’s biggest producers want this market share back. This is going to take a while. Bank of America’s head of commodities research, Francisco Blanch called it a “long and shallow” price war.
“It’s not a price war that is going to be short and steep; rather it’s going to be a price war that is long and shallow,” Blanch told Bloomberg a month ago. He went on to say the target, especially for the Saudis, is U.S. shale, which has become more resilient in recent years but is still vulnerable to lower oil prices because of its higher costs.
There is also another aspect to the change in OPEC approach, as detailed by Kpler’s Amena Bakr. It’s about group cohesion, Bakr wrote in an analysis for The National. With so much non-compliance with the cuts, those that were compliant needed to have their concerns addressed, too. “To restore a sense of fairness, an orderly plan to return the barrels gradually was needed to avoid a free-for-all situation that would drown the market in supply,” Bakr explained.
OPEC doesn’t even need to try very hard this time, because geopolitics is working in its favor. Last month, prices climbed immediately on the suggestion that the U.S.-Iran talks could escalate into missile action, after the Iranian defense minister threatened strikes on U.S. bases in the Middle East should the two fail to reach a deal on Iran’s nuclear program.
U.S. Congress work on fresh sanctions against Russia, targeting specifically its energy industry also served as a driver for higher prices, undeterred by EU plans to try and stop importing even petroleum products made with Russian crude, possibly in light of the EU’s track record of success with the anti-Russian sanctions.
Yet there is another factor helping OPEC stay on top: non-OPEC supply. The Financial Times reported in mid-June that the international supermajors have not made many new discoveries lately. Since 2020, new non-shale discoveries have averaged 2.5 billion barrels a year, the FT noted, citing a Goldman Sachs report. This is just 25% of the average annual in new discoveries for the three years prior to 2020. In other words, all the talk about non-OPEC swamping OPEC and taking the upper hand on international oil markets may have been a little premature—as may be the case of IEA demand projections.
The IEA has been notoriously bearish on oil demand, repeatedly citing rising EV sales, even though these sales in the U.S. are set for a serious decline. In Europe, EV sales are on the rise thanks to the return of subsidies but how long these are going to last is anyone’s guess. China is always the country everyone points to when it comes to EVs, and yet China’s oil demand is still growing—although peak talk is intensifying there as well, including from its own state oil majors.
In this situation, OPEC essentially does not need to do anything but sit and wait. Price-sensitive U.S. shale will slow down, lack of new discoveries will crimp the growth potential of the supermajors, and prices will rise, because peak demand does not mean a sharp drop afterwards. In fact, even if we have reached peak oil demand, the most likely next stage in demand evolution is a plateau at a level that would need to be maintained. OPEC would no doubt be happy to help do that.