The Iran war revealed a longstanding conflict within the world’s most influential oil cartel, which came to a head this spring as it faced the largest oil supply shock ever recorded. OPEC, the largest consortium of oil-producing nations, now confronts a struggle for its survival. The Strait of Hormuz has begun to reopen, prompting certain OPEC nations to advocate for an increase in oil production to compensate for previous losses in time and sales. That is rekindling longstanding disputes regarding production quotas, which previously prompted the United Arab Emirates, a key member of OPEC, to exit the organization in April. OPEC faces a pivotal decision: maintain unity within the organization and potentially depress oil prices, or prioritise profit maximisation at the risk of undermining the nearly 70-year-old cartel. While the rest of the world was scrounging around for any oil it could get this spring, the Middle East was awash in the resource. The sole issue: OPEC nations with significant operations in the Persian Gulf predominantly faced challenges in delivering their crude to customers. Iran’s closure and America’s subsequent blockade of the Strait of Hormuz have effectively restricted a fifth of the world’s oil supply.
Several OPEC members – namely Iran, Iraq, and Kuwait – were compelled to curtail their crude production and adopt a wait-and-see approach. With traffic in the strait beginning to increase once more, the competition for production quotas has commenced. Iraq, the bloc’s second-largest oil producer, is reportedly facing a critical juncture – the country’s oil minister stated that Iraq must determine its future with OPEC if production targets do not see a significant increase. Iraq’s production experienced a significant decline due to the war, plummeting by 75% to just over 1 million barrels per day in April and May, a stark reduction from more than 4.5 million barrels per day in January and February. Iraq seeks authorisation to achieve a historic production level of 5 million barrels per day as it emerges from conflict, with aspirations to elevate output to 7 million barrels per day in the long run, according to source. “What’s the motivation? They need the cash!” said Jay Hatfield. The ultimate decider will be Saudi Arabia, by far the largest OPEC member with the most control over the group. In contrast to Iraq and Kuwait, Saudi Arabia does not require a significant increase in production levels. The country managed to sustain its oil industry primarily by circumventing the strait through the use of pipelines that transported oil to a port in Yanbu, located on the opposite side of the nation.
That enabled the Saudis to transport their oil through the Red Sea – a route unavailable to Iraq and Kuwait, whose sole seaports are situated in the Persian Gulf. During the war, Iraq’s and Kuwait’s production experienced a significant decline, whereas Saudi Arabia’s production decreased by less than 40%. Saudi Arabia does not possess the same motivation to significantly increase oil production. Conversely, if production increases substantially prior to a recovery in global demand, it may undermine oil profits at a moment when the Middle East is already suffering from diminished business activity. “In this situation, it seems counterproductive to flood the market and push prices lower,” said Dan Pickering. OPEC has articulated its position clearly: it intends to exercise caution regarding supply increases while maintaining discussions with its member states. This weekend, OPEC+, which comprises Russia and several non-OPEC members, reached an agreement to elevate daily output by a mere 188,000 barrels. This marks the fifth incremental production increase since March. If OPEC maximises production, a complex operation fraught with uncertainty, there is no assurance that the resulting oil will find a market. Demand declined significantly during the war as prices escalated and fuel became scarce. Demand has not yet rebounded, and it is possible it may never reach its previous levels prior to the conflict – especially in China and Europe, which engaged in a significant electrification initiative during the spring. “The market is facing the risk of a temporary glut as trapped oil finally re-enters a system that has already spent months learning how to function without it,” noted Natasha Kaneva.
In theory, there ought to be purchasers: Global emergency and commercial petroleum stockpiles have experienced a significant decline, especially in the United States and China, as the world’s oil supply has decreased by an extraordinary 1.4 billion barrels since the onset of the war in March. Those reserves will require replenishment. However, that is likely more of a narrative for 2027 than for 2026, as both governments monitor the trajectory of oil prices, observed Kaneva. If OPEC production surges, it would be competing with approximately 90 million other barrels of oil that are beginning to exit the strait, as reported by Kpler. Should there be a lack of demand for oil, prices may experience a significant decline. Next year, $60 oil is in play, stated Kieran Tompkins. In 2028, oil may decline to $50 a barrel. That would represent favourable developments for consumers, yet it would pose challenges for several of the cartel’s major producers. OPEC is experiencing significant strain, yet it possesses a strong motivation to maintain cohesion among its members. Collaboration can facilitate navigation through a swiftly evolving market in a progressively adversarial global landscape, enabling competition with the United States, which has emerged as a formidable rival.
However, the cartel has successfully countered opposition in the past. “Iraq has outlined targets to raise production capacity multiple times before, without much success,” noted Tompkins. “But it nonetheless adds to the sense that cohesion and constraint within OPEC is breaking down.” The extraordinary strait lockdown could make this time different. It may compel Saudi Arabia to take decisive action. If that occurs, the Saudis retain a strategy to benefit from the situation: Saudi Arabia could consent to significantly increase production caps and output, thereby driving oil prices down into the $40 range – a level that only the affluent Saudis could withstand. “[Saudi Crown Prince] Mohammed bin Salman could say: ‘If you push me too far, maybe we’ll grow production, too,’” said Vikas Dwivedi. “’We’ll see everybody at the bottom and see how everybody’s feeling.’” Dwivedi doesn’t consider that the most likely scenario, but it’s not outside the realm of possibility, either. “It would be bitterly ironic if we went from the biggest supply shock ever to a historic supply glut,” he said.