Oil Market Shift Amid U.S.-Iran Conflict Reversal: OPEC+’s Difficult Balance From Supply Shortage to Potential Surplus

TradingKey - As the temporary ceasefire agreement between the US and Iran takes effect and shipping through the Strait of Hormuz gradually resumes, the global crude oil market is undergoing a dramatic reversal.

The narrative of supply shortages, once strained by geopolitical conflicts, has faded, replaced by concerns over a potential supply glut. The OPEC+ alliance is facing unprecedented policy challenges as it struggles to find a balance between recovering production and price stability.

From Supply Panic to Surplus Concerns

In the early stages of the U.S.-Iran conflict, the partial blockade of shipping lanes in the Strait of Hormuz triggered global crude supply panics, driving Brent crude prices to a peak of $119.5 per barrel, the highest since 2008.

At that time, the market widely expected a long-term disruption in crude oil supply, prompting the International Energy Agency to coordinate the release of a record 400 million barrels of oil reserves among 32 member countries, while the U.S. also released approximately 172 million barrels from its Strategic Petroleum Reserve to stabilize the market.

However, with the U.S. and Iran reaching a temporary ceasefire agreement in mid-June, shipping through the Strait of Hormuz gradually resumed, and market expectations quickly reversed.

According to high-frequency data from Kpler, Gulf oil exports in June increased by over 3 million barrels per day compared to May, exceeding 10 million barrels per day. Although overall export volumes remained about 40% below pre-war levels, the pace of supply recovery far exceeded market expectations. Brent crude prices have fallen 43% from their wartime peak and are currently hovering around $72 per barrel, returning to trading levels seen before the outbreak of the war with Iran.

Several international investment banks quickly lowered their crude oil target prices, pointing out that a global crude oversupply might re-emerge. This shift has significantly compressed the policy leeway for OPEC+, transitioning from boosting production to secure supply during wartime to stabilizing oil prices in peacetime, which in turn has highlighted internal rifts and conflicts within the organization.

OPEC+ Dilemma over Production Increases

In response to market changes, key OPEC+ member states agreed on a new round of modest production quota increases last Sunday, allowing members to gradually boost output as shipping through the Strait of Hormuz resumes.

Since the outbreak of the US-Iran conflict, the group has approved a cumulative production restoration of over 900,000 barrels per day (bpd), which includes a planned increase of 188,000 bpd in August. OPEC+ has established a roadmap aimed at fully unwinding the two rounds of production cuts from 2023 by September through continuous quota increases.

However, these production increase targets face significant implementation challenges; due to the war, OPEC+ oil production fell to 33.13 million bpd in May, down from 42.77 million bpd in February. Production began to recover in June but remained below pre-war levels. In fact, since the conflict began, most of the OPEC+ production increase plans have existed only on paper, with actual output falling far short of targets.

The market generally believes that even if OPEC+ members intend to raise production, it will be difficult to return to pre-war levels in the short term. The recovery of oil production facilities, the reconstruction of transportation capacity, and geopolitical uncertainties will all limit the pace of the output rebound.

More importantly, as major consumer markets such as Asia show signs of temporary supply easing, some forecasts suggest a risk that the medium-term production growth rate could temporarily outpace demand growth.

Saudi Arabia's Coordination Dilemma

Against the backdrop of a potential shift toward looser supply and demand, Saudi Arabia may once again return to its position as the "swing producer." The market generally believes that if the supply easing continues further, Saudi Arabia may be forced to slow down its own pace of production increases or even push again for a broader production-cut coordination mechanism to prevent downward pressure on prices from expanding.

However, the execution of this path has become significantly more difficult; the UAE already exited the OPEC+ framework in May this year, serving as an important signal of a rift in the organization's long-term cooperation mechanism.

The UAE possesses a large amount of spare capacity, and its demand to prioritize releasing production naturally creates tension with the overall logic of production cuts.

At the same time, Iraq has also publicly stated that if its production quota cannot be raised in the long term, it cannot rule out re-evaluating its form of participation within the organization. Having suffered from the impacts of war, Iraq has faced significant fiscal pressure and has a stronger reliance on production growth.

Structurally, Kazakhstan's long-term behavior of exceeding production limits has de facto weakened the binding force of the quota mechanism, putting continuous pressure on internal discipline within the organization. Against this background, the coordination costs of redistributing market space among member countries have risen significantly.

The OPEC+ Dilemma

For the market, the core focus has shifted from the "pace of supply recovery" to "who will bear the cost of rebalancing." Saudi Arabia's policy choices, along with OPEC+'s coordination capabilities amid a fracturing landscape, will serve as key variables for oil price movements in the coming months.

If OPEC+ fails to effectively coordinate production cuts, the global crude market could soon face an oversupply situation, which would put further pressure on oil prices. However, if Saudi Arabia forces the cuts through, it could exacerbate internal divisions within the group and potentially trigger a new war for market share.

Over the longer term, this US-Iran conflict has exposed the vulnerability of the OPEC+ mechanism. In the face of geopolitical shocks and rapid market changes, traditional production coordination mechanisms appear inadequate. Moving forward, OPEC+ may need to rethink its cooperation model to adapt to a more complex and volatile global energy landscape.