Did Trump get his wish? OPEC launches a new round of supply shocks, and the global oil market may face a "supply surplus wave."

OPEC+ has launched a new round of supply shocks, which may exacerbate the global oversupply risk of crude oil and put further downward pressure on oil prices, helping to meet Trump's call to lower fuel costs, but also posing profitability challenges for U.S. and OPEC oil producers.

According to a previous article by Wall Street Insight, on July 5, eight major OPEC+ member countries led by Saudi Arabia agreed in an online meeting to increase production by 548,000 barrels per day in August, exceeding the market expectation of 411,000 barrels per day. This potential increase reflects a significant shift in OPEC+'s policy direction this year, marking an accelerated push for the organization's aggressive strategy to reclaim market share.

On July 7, media reports indicated that the OPEC+ online video conference made this unexpected decision in just 10 minutes. Saudi Energy Minister Prince Abdulaziz bin Salman pushed for this acceleration in production, reflecting the country's eagerness to restart more idle capacity.

Analysts believe that OPEC's decision to increase production will help meet Trump's call to lower fuel costs, benefiting consumers. However, it will pose profitability challenges for global oil producers, from U.S. shale oil regions to OPEC member countries.

Brent crude futures have fallen 11% in the past two weeks, quickly shaking off the impact of the conflict with Iran. Goldman Sachs and JP Morgan have consistently predicted that as Trump's trade tariffs cast a shadow over the global economy and impact oil demand, oil prices will further decline to $60 this year.

Production Increase Exceeds Expectations, Recovery Timeline Advanced

This OPEC+ production increase decision involves eight member countries: Saudi Arabia, Russia, the United Arab Emirates, Kuwait, Oman, Iraq, Kazakhstan, and Algeria. The increase of 548,000 barrels per day in August significantly exceeds the previous monthly increases of 411,000 barrels per day in May, June, and July.

The alliance stated that it will consider increasing production by another 548,000 barrels per day in September at the meeting on August 3. If this plan is implemented, OPEC+ will complete the withdrawal of the 2.2 million barrels per day production cut implemented in 2023 a year earlier than originally planned.

As of July, the eight member countries participating in the production increase have announced or implemented a total production increase of 1.37 million barrels per day, accounting for 62% of the 2.2 million barrels per day cut they are in the process of withdrawing.

According to the article by Wall Street Insight, the backdrop for OPEC+'s accelerated production increase is the growing supply competition from other oil-producing countries, including the United States. The organization is seeking to expand its market share in this competitive environment In addition, part of the reason for the accelerated production increase is that some OPEC+ member countries have violated quota restrictions. According to media reports, the production of member countries such as Kazakhstan has significantly exceeded targets, causing dissatisfaction among other member countries that strictly adhere to the production cut agreements.

Supply and Demand Balance Under Test, Market Divergence Intensifies

Despite concerns about oversupply, Saudi Arabia still shows confidence in demand. According to an article from Wall Street Watch, Saudi Aramco has set the official selling price of Arab Light crude oil for August sales to Asia at a premium of $2.20 per barrel over the average price of Oman/Dubai, up from a previous premium of $1.20 per barrel.

In response, OPEC+ officials pointed out that summer demand is one of the reasons for Saudi Arabia's optimistic outlook. Crude oil inventories at the key U.S. storage hub in Cushing are declining, the price spread structure does not indicate an oversupply, and U.S. diesel inventories have also significantly decreased.

However, other forecasting agencies remain cautious. The International Energy Agency, based in Paris, predicted before the production increase announcement that there would be an oversupply equivalent to about 1.5% of global consumption in the fourth quarter.

UBS AG analyst Giovanni Staunovo stated:

"The oil market is still tight at the moment, indicating that it can absorb additional supply, but risks such as trade tensions are rising, which means the market may look less tight in the next 6-12 months, posing downside risks to prices."

Increased Downward Pressure on Prices: Is Trump Getting His Wish?

Further declines in oil prices could alleviate Trump's repeated calls for lowering fuel costs to curb the cost of living crisis.

However, falling prices will impact the U.S. oil industry, affecting major companies like Exxon Mobil and shale oil explorers who broadly support Trump's return to the White House.

Shale oil executives indicated in a recent survey that as oil prices fall, they expect the number of drilling activities this year to be significantly lower than planned for early 2025.

For OPEC+ member countries, low oil prices also pose fiscal pressure.

According to data from the International Monetary Fund, Saudi Arabia needs oil prices to exceed $90 per barrel to cover government spending and support Crown Prince Mohammed bin Salman’s plans to stimulate the country's economy.

Additionally, Saudi Arabia is dealing with a soaring budget deficit and has been forced to cut spending on some flagship projects of the Crown Prince. Former head of the International Energy Agency's oil market and industry department, independent analyst Neil Atkinson, stated:

"They (Saudi Arabia) do have the option to pivot 180 degrees. But at the same time, they have no choice but to ensure market share and accept lower prices. You might as well accept the reality of the world, and that is exactly what they are doing."