How Many More Times Will OPEC+ "Weaponize Crude Oil" to Increase Production? Morgan Stanley and Goldman Sachs Have Different Opinions

As OPEC+ officially announced the continuation of its above-quota production increase in July, investors in the energy industry began to focus on the ultimate question: When will this round of production increases come to an end? What will be the subsequent impacts?

As background, to maintain oil price stability, eight OPEC+ countries led by Saudi Arabia decided in 2023 to voluntarily cut production by 2.2 million barrels per day (bpd). After discussions, these countries began to lift restrictions at a rate of 137,000 bpd starting from April this year. As the "leading nations" within the organization grew increasingly dissatisfied with members such as Kazakhstan and Iraq for producing above their quotas, the oil production increase policy rapidly entered a "weaponized" state.

Including the latest announced production increase in July, the eight OPEC+ countries will continue to lift production restrictions for the third consecutive month at a rate of 411,000 bpd.

What will be the next move?

Analysts including Martijn Rats from Morgan Stanley pointed out in a report on June 2 that OPEC+ is likely to continue increasing production over the next three months, a move that will push oil prices downward.

This means that by October this year, the 2.2 million bpd production cuts will be fully reversed.

Morgan Stanley analysts stated in the report: "The latest announcement shows that there is little sign of a slowdown in the pace of production increase quotas. The quota increase may create room for Saudi Arabia to increase production, with Kuwait and Algeria also benefiting to some extent."

However, it will be difficult for the remaining members of the "Group of Eight" to achieve the same magnitude of production growth due to the quota increase. Morgan Stanley pointed out that OPEC+ only achieved about two-thirds of its planned production increase in May, so this gap will likely persist in June and July.

Analysts also indicated that as refineries complete maintenance, crude oil demand will enter a seasonal peak (usually reaching its peak in May), coupled with healthy refining margins stimulating crude oil processing rates, all of which will provide short-term support for oil prices. However, as the impact of US tariff policies gradually emerges and non-OPEC supply accelerates, this support may fade by the end of the year.

The report expects that the average price of Brent crude oil will be $57.5 per barrel in the last two quarters of this year, and will further decline to $55 per barrel in the first half of next year.

Meanwhile, Goldman Sachs, which also believes that crude oil demand will slow down by the end of the year, expects in its Sunday report that the pace of OPEC+ production increases will only continue until August. The investment bank had previously expected OPEC+ to pause production increases after July.

Daan Struyven and other Goldman Sachs analysts pointed out that the current fundamentals of spot crude oil are relatively tight, and factors such as global economic activity data exceeding expectations and seasonal summer demand support continued production increases. Therefore, by July 6, when the August production level is decided, the extent of the demand slowdown at that time may not be enough to halt the pace of production increases.

Goldman Sachs now believes that in the face of production increases from non-OPEC+ oil-producing countries and the impact of the global economic slowdown in Q3 this year, OPEC+ will maintain existing capacity quotas unchanged from September, although "the risk of continued production increases still exists."

Analysts maintain their forecast for an average Brent crude oil price of $60 per barrel for the remainder of this year, with a further decline to $56 in 2026.

Why are oil prices still rising today?

As of press time, following OPEC+'s official announcement of July production increase targets last Saturday, Brent crude oil futures jumped nearly 3% on Monday.

(Source: TradingView)

The core reason for the oil price increase is the drone strike launched by Ukraine against a Russian airbase. Additionally, the market had already priced in the production increase news last week, which also contributed to Monday's price increase.

Stephen Innes, managing partner at SPI Asset Management, interpreted the situation, saying, "Crude oil trading seems to have suddenly realized the existence of geopolitical risks... Russia is being strategically provoked, and the market should prepare for strong retaliation."

Innes also stated that OPEC+, which once had the core mission of defending oil prices, has now shifted to a production-first strategy—weaponizing crude oil to punish quota violators, squeezing US shale oil producers, and currying favor with Washington, all "like dancing on the edge of a fiscal cliff." He pointed out, "If Saudi Arabia is playing the long game, they are betting that the current oil price decline will be the cost of future market control."