The oil market has entered choppy waters once again. Crude prices fell by a dramatic 18% in April y/y — the sharpest monthly drop since November 2021 — sending Brent tumbling from over $74 a barrel at the start of the month to just under $60 by early May. Much of the narrative has focused on the macro picture: concerns that Donald Trump’s escalating Liberation Day tariff war could derail global trade and suppress energy demand. But such a view misses a deeper, more structural fault line.

“A much less-discussed reason why crude has lately got much cheaper is an ongoing power struggle within Opec, the twelve-nation oil exporters’ cartel,” argues Liam Halligan, Daily Telegraph economics writer and columnist at bne IntelliNews in his “When the Facts Change” blogpost.

While economic indicators have begun to flash red — China’s April manufacturing PMI dropped to 49.0 from 50.5, which means the economy is now contracting — the oil price collapse cannot be pinned on slowing demand alone.

“Last month’s 18% fall in crude prices also reflects ongoing efforts by Saudi Arabia to discipline OPEC’s ‘rogue producers’ — and this is where the story gets really interesting,” he notes.

For now, the US and China remain locked in an alarming stand-off – with tariffs of up to 145pc and 125pc respectively on each other's goods exports. A prolonged trade war between the world’s two largest economies, generating over two-fifths of global GDP between them, would of course be disastrous.

America’s economy contracted 0.3pc during the first quarter of this year, figures released last week showed, sharply down from a 2.4pc expansion over the previous three months. China’s economy, still growing at a comfortable 5.4% in the first quarter, remains the world’s largest importer of crude. The fallout from disrupted Sino-US trade is indeed reverberating across global supply chains, but Halligan says the real driver of this oil rout is due to a power struggle within the cartel itself.

Oil production hiked not cut

With global growth slowing thanks to Trump’s bizarre trade policies, demand for energy is expected to fall and so pull-down prices, but in a reversal of normal practice OPEC has chosen this moment to increase production quotas by around 400,000 barrels a day – almost exactly the extra amount that Kazakhstan is producing in defiance of its agreed OPEC quotas. That will depress prices even more.

The tactic is not new. OPEC controls around 40% of global oil output and Riyadh has previously used price-driven pressure to bring fellow OPEC members into line — most notably in the mid-1980s, the late 1990s and again in 2020. The reasoning is clear — let prices fall to levels that become painful for smaller, eat up all their windfall “freeloading” profits, so the non-compliant states with weaker fiscal positions will return to the fold.

“That’s why, in a reversal of normal practice, key Opec members led by Saudi recently voted through higher production for the whole group, hoping that the ensuing price declines would then force the quota-busting troublemakers, which tend to be much poorer economies, to toe the line,” Halligan explains.

The troublemakers are not hard to identify. Kazakhstan and Iraq have significantly exceeded their production quotas. As bne IntelliNews reported, Kazakhstan is caught in a dilemma between taking badly needed short-term cash from overproducing and the long-term need to attract investment to continue to develop its hydrocarbon sector.

In Kazakhstan’s case, the ramp-up has been facilitated by western majors Chevron and Exxon Mobil, who are expanding operations at some of the country’s most productive fields. Even the UAE has pushed past its limits, although Riyadh has shown reluctance to publicly chastise its wealthy Gulf neighbour.

The result? A de facto shift in OPEC’s policy stance. April saw the cartel raise output by 130,000 barrels per day. This was followed by an even more aggressive 411,000-barrel hike in May, with another identical increase now planned for June. Taken together, these additions reverse 952,000 barrels per day of the 2.2mn barrels the cartel pledged to cut in 2023 — a rollback of roughly 43%.

“While 952,000 barrels per day is less than 1% of total global oil supply of around 102mn barrels daily, that is more than enough to impact current oil prices and, crucially, forecasts of where oil prices will go,” says Halligan.

For now, markets remain caught between two forces: faltering global demand on the back of trade friction, and a deliberate supply glut from within the very group meant to stabilise prices. Traders looking for clarity from OPEC’s next moves may be disappointed. If Riyadh’s strategy works, discipline may return — but only at the cost of more price volatility in the near term.

In the meantime, the biggest threat to oil prices right now may not come from Washington or Beijing, but from Baghdad, Nur-Sultan and Abu Dhabi, says Halligan.

Liam Halligan is a long serving journalist covering Emerging Markets and economics. He is also columnist at the Daily Telegraph and bne IntelliNews editor-at-large. This comment first appears on his When the Facts Change substack here.

 

The oil market has entered choppy waters once again. Crude prices fell by a dramatic 18% in April y/y — the sharpest monthly drop since November 2021 — sending Brent tumbling from over $74 a barrel at the start of the month to just under $60 by early May. Much of the narrative has focused on the macro picture: concerns that Donald Trump’s escalating Liberation Day tariff war could derail global trade and suppress energy demand. But such a view misses a deeper, more structural fault line.

“A much less-discussed reason why crude has lately got much cheaper is an ongoing power struggle within Opec, the twelve-nation oil exporters’ cartel,” argues Liam Halligan, Daily Telegraph economics writer and columnist at bne IntelliNews in his “When the Facts Change” blogpost.

While economic indicators have begun to flash red — China’s April manufacturing PMI dropped to 49.0 from 50.5, which means the economy is now contracting — the oil price collapse cannot be pinned on slowing demand alone.

“Last month’s 18% fall in crude prices also reflects ongoing efforts by Saudi Arabia to discipline OPEC’s ‘rogue producers’ — and this is where the story gets really interesting,” he notes.

For now, the US and China remain locked in an alarming stand-off – with tariffs of up to 145pc and 125pc respectively on each other's goods exports. A prolonged trade war between the world’s two largest economies, generating over two-fifths of global GDP between them, would of course be disastrous.

America’s economy contracted 0.3pc during the first quarter of this year, figures released last week showed, sharply down from a 2.4pc expansion over the previous three months. China’s economy, still growing at a comfortable 5.4% in the first quarter, remains the world’s largest importer of crude. The fallout from disrupted Sino-US trade is indeed reverberating across global supply chains, but Halligan says the real driver of this oil rout is due to a power struggle within the cartel itself.

Oil production hiked not cut

With global growth slowing thanks to Trump’s bizarre trade policies, demand for energy is expected to fall and so pull-down prices, but in a reversal of normal practice OPEC has chosen this moment to increase production quotas by around 400,000 barrels a day – almost exactly the extra amount that Kazakhstan is producing in defiance of its agreed OPEC quotas. That will depress prices even more.

The tactic is not new. OPEC controls around 40% of global oil output and Riyadh has previously used price-driven pressure to bring fellow OPEC members into line — most notably in the mid-1980s, the late 1990s and again in 2020. The reasoning is clear — let prices fall to levels that become painful for smaller, eat up all their windfall “freeloading” profits, so the non-compliant states with weaker fiscal positions will return to the fold.

“That’s why, in a reversal of normal practice, key Opec members led by Saudi recently voted through higher production for the whole group, hoping that the ensuing price declines would then force the quota-busting troublemakers, which tend to be much poorer economies, to toe the line,” Halligan explains.

The troublemakers are not hard to identify. Kazakhstan and Iraq have significantly exceeded their production quotas. In Kazakhstan’s case, the ramp-up has been facilitated by western majors Chevron and Exxon Mobil, who are expanding operations at some of the country’s most productive fields. Even the UAE has pushed past its limits, although Riyadh has shown reluctance to publicly chastise its wealthy Gulf neighbour.

The result? A de facto shift in OPEC’s policy stance. April saw the cartel raise output by 130,000 barrels per day. This was followed by an even more aggressive 411,000-barrel hike in May, with another identical increase now planned for June. Taken together, these additions reverse 952,000 barrels per day of the 2.2mn barrels the cartel pledged to cut in 2023 — a rollback of roughly 43%.

“While 952,000 barrels per day is less than 1% of total global oil supply of around 102mn barrels daily, that is more than enough heavily to impact current oil prices and, crucially, forecasts of where oil prices will go,” says Halligan.

For now, markets remain caught between two forces: faltering global demand on the back of trade friction, and a deliberate supply glut from within the very group meant to stabilise prices. Traders looking for clarity from OPEC’s next moves may be disappointed. If Riyadh’s strategy works, discipline may return — but only at the cost of more price volatility in the near term.

In the meantime, the biggest threat to oil prices right now may not come from Washington or Beijing, but from Baghdad, Nur-Sultan and Abu Dhabi, says Halligan.

Liam Halligan is a long serving journalist covering Emerging Markets and economics. He is also columnist at the Daily Telegraph and bne IntelliNews editor-at-large. This comment first appears on his When the Facts Change substack here.