Opec's unexpected production increase, why did oil prices rise instead of falling?

The Opec+ decision to increase production beyond expectations not only failed to lower oil prices but also triggered a new round of intensifying competition for global crude oil market share. This unusual phenomenon reflects that the global oil supply-demand balance is tighter than the surface data suggests, as well as a fundamental shift in the strategic focus of the oil-producing country alliance.

According to a previous article mentioned by Wall Street Insight, last weekend, Opec+ agreed to increase crude oil production by 548,000 barrels per day in August, far exceeding the previous months' increase of 411,000 barrels per day. However, international oil prices rose instead of falling, with both WTI crude and Brent crude reaching two-week highs. Analysts believe that this "super production increase" is actually a clear signal sent by Opec+ to its competitors.

Stephen Innes, a partner at SPI Asset Management, stated that this astonishing production increase is "not just a number, but a declaration." Opec+ has abandoned its refined price management strategy and is now "using the number of barrels to seize market share." The organization plans to completely reverse last year's voluntary production cut of 2.2 million barrels per day by September, a full year ahead of expectations.

At the same time, some analysts pointed out that the current tension in the oil market may be severely underestimated. Although surface data shows a relatively balanced supply and demand, several key indicators suggest that actual supply is tighter than official statistics indicate.

In recent months, the reliability of traditional market indicators has been challenged. The diesel price spread, which has historically been regarded as a reliable indicator of market supply-demand conditions and economic growth, has been distorted due to extreme weather and other factors. Additionally, refinery capacity reductions have reshaped the supply-demand landscape.

U.S. Shale Oil Industry Under Pressure

The U.S. shale oil industry is facing production bottlenecks, creating opportunities for Opec+ to regain market share. Data from the U.S. Energy Information Administration shows that falling oil prices have led to a slowdown in drilling activities among U.S. producers, with the agency lowering its forecast for average daily crude oil production in the fourth quarter of 2026 to below 13.3 million barrels.

Baker Hughes data shows that the number of active oil rigs in the U.S. has fallen to 425, the lowest level since October 2021, far below the peak of about 780 rigs in 2022. City Index and FOREX.com market analyst Fawad Razaqzada pointed out:

When WTI crude oil prices are at $60 per barrel, U.S. oil rigs can remain operational, but when prices drop to $50 per barrel, "the oil fields will go quiet."

Innes analyzed that Opec+ is betting on regaining market share through a price war "using barrels rather than words," forcing marginal producers out of the market. With U.S. drilling activities failing to achieve "crazy drilling," this may be the perfect time for Opec+ to increase production as much as possible.

Traditional Indicators Face Risk of Ineffectiveness

Some analysts pointed out that this winter's market data reveals the limitations of traditional analytical methods. An abnormal high level of spot premium of about $20 per ton appeared when the March ICE natural gas oil contract expired, indicating significant tightness in the spot market This stands in stark contrast to the significant decline in crude oil parity during the same period, which was mainly influenced by the so-called "Trump drop" and the pullback in U.S. stocks.

The diesel crack spread fell from $21 per barrel in mid-February to below $17 per barrel, leading some observers to believe that the market is beginning to reflect an oversupply issue. However, a deeper analysis of the current spread structure, particularly the situation after winter and the economic benefits for refineries, indicates that the fundamentals may not be as pessimistic as the surface data suggests.

Although the diesel spread may have overestimated medium-term oil demand and global economic growth during winter, they remain more reliable than crude oil parity as the cold weather effects dissipate. In fact, the markets for crude oil, diesel, and other fuels are all showing a spot contango structure, indicating a lack of demand for storing crude oil.

Refining Capacity Contraction Reshapes Supply and Demand Dynamics

Refinery margins provide another key signal. Despite broader economic concerns, margins remain at historically healthy levels, even after the diesel crack spread suffered a sell-off due to market sentiment. The strong crack spreads for high-sulfur fuel oil and naphtha also indicate a need to maintain high refinery utilization rates.

Europe is set to lose about 400,000 barrels per day of refining capacity, including the closure of Grangemouth and several German refineries. In the U.S., LyondellBasell's Houston refinery has already shut down, and more closures may occur on the U.S. West Coast later this year.

One of the key unknowns in the coming months is to what extent the market has already absorbed the impact of refinery closures. While traders are actively considering expected changes, the full impact of these shutdowns may not become apparent until inventories begin to decline.

Geopolitical Factors and Demand Outlook Support Oil Price Increase

In addition to the competition for market share and tightening fundamentals, geopolitical factors also provide significant support for oil prices. The 12-day conflict between Israel and Iran in June caused Brent crude to surge over 30% within three weeks, before retreating due to U.S. airstrikes on Iran and the subsequent ceasefire between Israel and Iran.

Innes emphasizes the ongoing impact of geopolitical tensions on the oil market. Additionally, the recurring situation in the Red Sea is affecting global supply chains, with the Suez Canal trade route closed due to attacks by Houthi forces, significantly extending the time for diesel transportation to Europe.

Meanwhile, the improvement in the global oil demand outlook has also driven oil prices higher. Since April, concerns about trade and inflation have eased, with the S&P 500 and Nasdaq indices rebounding significantly from their April lows and recently reaching all-time highs. Razaqzada points out:

Previously, the market was worried that trade disputes would harm the global economy and drag down oil demand, but these concerns have "dramatically faded." Inflation has not risen significantly as expected due to high tariffs, many central banks continue to cut interest rates, and the "Great Beautiful Plan" passed by the Republicans is expected to boost the economy in the short term.

Finally, strong demand during the summer driving season also provides seasonal support for oil prices. However, despite the recent rise in oil prices, WTI crude is still down 4.7% year-to-date, indicating that the market is still seeking a balance point