The 2 August OPEC+ meeting saw major producers decide to increase output by 188,000 barrels per day in September, bringing the organization's two-phase production restoration plan to a close by the end of that month, save for a small shortfall due to the UAE's departure from OPEC. This September increase was in line with market expectations. Given that geopolitical tensions in the Middle East are already impacting output from some member nations, the decision has a limited near-term effect on the oil market, primarily posing a bearish risk for the long term.
Phase One of OPEC+ Was a Bearish Force; Phase Two Had a Muted Impact
As supply-demand dynamics have shifted in recent years, OPEC+ has been planning the reversal of previous production cuts, a process widely referred to as "hiking" output. The plan was first conceived in 2024 and implemented in 2025, unfolding in two distinct phases. The first phase, from April to September 2025, involved unwinding the 2.2 million b/d voluntary cuts. Over six consecutive months, the pace of the hikes accelerated from a slow start to a faster tempo. April saw a 138,000 b/d increase; May, June, and July each saw a 410,000 b/d rise; and August and September both saw a 550,000 b/d increase. By September 2025, OPEC+ had completed the 2.2 million b/d voluntary cut restoration a full year ahead of schedule. Combined with the UAE's 300,000 b/d increase from its baseline adjustment, the total cumulative increase from major producers was close to 2.5 million b/d. The pace of this first phase was notably faster than market expectations, creating a clear bearish signal. This, combined with bearish factors like the Trump-era tariffs triggering international trade disputes and raising concerns about economic growth and energy demand, pressured crude oil prices into a volatile downward trend from January to May 2025.
The second phase, covering October 2025 to September 2026, focused on the gradual unwinding of the 1.65 million b/d collective cuts. Output was set to rise by 137,000 b/d each month from October to December 2025. Producers then paused the increases in the first quarter of 2026, before restarting them in the second quarter. The monthly increases were 206,000 b/d for April and May, and 188,000 b/d for June through September. Excluding the UAE's missing 75,000 b/d share for the June-September period, the total increase from the second phase was 1.575 million b/d. Compared to the first phase, the second phase is much more moderate and gradual, including a production pause. Furthermore, significant geopolitical disruptions in the Middle East and actual output reductions from some countries effectively rendered the policy "nominal." Therefore, the bearish impact of this second phase has not been strongly felt. However, it is expected that once geopolitical disturbances subside, the rapid implementation of these production hikes will create a sustained bearish pressure on the oil market over the medium to long term.
Insufficient Capacity and Geopolitical Turmoil Keep Actual Output Well Below Targets
While the production hike plan from key OPEC+ members has progressed steadily, its actual implementation has varied across different periods. Data shows that even before the hikes began, actual output from major producers was already significantly above their target levels. For instance, in February and March 2025, actual production exceeded targets by nearly 400,000 b/d. When the increases started in April 2025, the small increments meant the gap between actual and target output narrowed modestly but remained above 200,000 b/d. As the plan progressed, April and May saw actual production adjust more closely to the targets. However, as the pace of increases accelerated, the limitations of aging infrastructure and constrained production capacity became apparent for some member states. From July to September, actual output began to fall short of targets, with the deficit hovering around 100,000 b/d.
Entering the second phase, the disconnect between actual and target production deepened. In the fourth quarter of 2025, the gap widened from 200,000 b/d to nearly 500,000 b/d. This persistent shortfall in capacity was a key reason for the pause in production increases during the first quarter of 2026. The situation has not improved. The second quarter was further complicated by the Middle East conflict, which led to direct output cuts from several countries. In April and May 2026, the gap between actual and target production for major producers surged to over 9 million b/d, driven by cuts from Saudi Arabia, Iraq, Kuwait, and the UAE. The combination of insufficient capacity and geopolitical disruptions has caused actual output to fall far short of targets. This has made the production hike plan "nominal" in the short term, leading to a general market expectation that producers will pause hikes after September and maintain their current output policies. The near-term tightness in supply continues to support the oil market. However, if geopolitical disruptions ease in the third quarter, a recovery in production from key nations in the fourth quarter would bearish for the oil market over the medium to long term.
Market Outlook: Geopolitics Remain Key, Shipping Recovery is the Core Variable for Oil Prices
The primary factors influencing the oil market currently remain focused on geopolitics, industry fundamentals, and the macroeconomy. (1) Geopolitics: The outlook for the Middle East is uncertain. While there has been increased talk of US-Iran negotiations recently, significant differences remain on issues like the regional situation and the Strait of Hormuz. Market expectations lean toward a low probability of a substantive agreement in the near term. The most likely scenario is a continuation of the "talking while fighting" stalemate between the US and Iran. In this context, crude oil prices are expected to remain volatile within a $70-$90/barrel range. Additionally, the geopolitical risks from the Eastern European situation and related sanctions on Russia continue to provide underlying support for the oil market.
(2) Industry Fundamentals: On the demand side, global oil demand growth is tepid, offering limited support. The US is in its seasonal consumption peak, with robust demand and low inventory levels providing a boost that is expected to last through September. China's moderate demand improvement in the third quarter also offers potential support. On the supply side, OPEC+'s gradual production hike plan extends to September, after which policy stability is more likely. The near-term impact of the hikes is limited by geopolitical disruptions that are restricting output recovery in parts of the Middle East. However, the bearish effect on the medium to long term remains. Meanwhile, other producers like the UAE, the US, and Brazil are expected to increase output, which could further improve the supply-demand balance and pressure prices.
(3) Macroeconomy: Rising US re-inflation risks are complicating the Federal Reserve's policy decisions, and global economic and financial concerns continue to weigh on market sentiment. In summary, the market will continue to focus on the Middle East situation in the near term. US-Iran talks and the status of shipping through the Strait of Hormuz remain the core variables driving oil price volatility. Beyond this, the market is also watching OPEC+ output changes, US petroleum inventories, and Fed monetary policy. Oil prices are expected to remain in a volatile, oscillating pattern over the next three months, with high volatility persisting. Monthly average prices are likely to be stronger in the earlier part of the period and weaken later on, with the main trading range expected to be between $70 and $90 per barrel. Risk factors include an escalation of geopolitical tensions and a systemic economic or financial crisis.
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