OPEC+ Supply Hike Threatens to Swamp Global Market

Oil prices dropped after OPEC+ agreed to increase output, raising concerns about a global glut and decreased demand due to the trade war.

The output increase of over 400,000 barrels a day starting in June matches a similar increase announced last month, and Saudi Arabia signaled further increases may follow.

The move could put pressure on prices, which could drop to the low $50s, and may be welcomed by central bankers, but could also be affected by the ongoing trade war and its impact on energy demand.

Bloomberg's Mike McGlone reports.

State producer Saudi Aramco increased the price of all of its crude, including the main Arab Light grade, for its biggest buyers in Asia by 20 cents a barrel for June, according to a price list seen by Bloomberg. The company had been expected to raise that pricing by 30 cents a barrel, according to a survey of refiners and traders done before the OPEC+ meeting. It lowered prices for other regions, including Europe and the US.  

Next month’s increase for Asia partly rolls back a bigger-than-expected cut for May, and keeps the price for Arab Light crude near the lowest level since the start of this year, when the grade sold at a 90 cent premium. 

The price rise comes after profit from refining Middle Eastern crude rose at the end of last month, a period traders and Aramco typically watch for judging the market. Trump has also threatened sanctions on any country buying oil from Iran after the two countries delayed the next round of talks aimed at reaching a deal to limit the Islamic republic’s nuclear program.

Higher OPEC+ output and President Donald Trump’s global trade war have contributed to a nearly 20% slump in benchmark oil prices this year. OPEC+ delegates have attributed the supply surge to Saudi frustration with overproduction by some members. The decline in prices is likely to please Trump, who has called for cheaper oil and is scheduled to visit the Middle East, including Saudi Arabia, middle of this month.

The Saudis have also warned that more crude could be coming to the market if recalcitrant members don’t respect their output pledges, according to delegates.

Still, cheaper oil puts increasing pressure on Saudi Crown Prince Mohammed Bin Salman’s signature Vision 2030 plan to modernize the country’s economy. The state, including investment by its sovereign wealth fund, needs prices above $100 a barrel to finance the planned tourist resorts, job creation and industrial development, according to Bloomberg Economics.

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