By accelerating the fall in oil prices, the timing between OPEC+’s decision to accelerate quota easing, and the Trump administration’s announcement of the start of a tariff war could limit inflationary pressures for US consumers and put pressure on the cartel’s undisciplined members. However, the convergence of interests between the heavyweights of the oil market is likely to be short-lived. This policy is likely to make the economic equation increasingly difficult for US producers. At the same time, by putting pressure on public finances, it poses a risk to the cohesion of the cartel.
The timing between OPEC+’s decision on 3 April to accelerate the easing of its oil production quotas and the Trump administration’s announcement on 2 April that it would launch a global tariff war is no coincidence. With the oil market in a state of oversupply, there was no good time for OPEC+ to re-enter the market. Synchronising with the US decision allows the cartel to benefit from a knock-on effect and to boost the effectiveness of its decision. So how long will the convergence of interests between the two heavyweights of the global oil market last?
Objective allies in the short term…
For the Trump administration, the fall in oil prices to around USD 60/barrel provides clear short-term political benefits. This fall could at least partially offset the inflationary pressures linked to the higher cost of imports for US consumers. Although there are several objectives behind OPEC+’s decision to accelerate the ease in quotas, the pressure exerted on the cartel’s non-compliant members (mainly Kazakhstan and Iraq) is one of the main objectives. The cartel, led by Saudi Arabia, hopes to force both these countries to reduce their production by putting pressure on prices.
…running the risk of rapidly rendering the “drill, baby, drill” agenda obsolete
This policy, which aims to influence prices, entails significant risks for both players. The most obvious affects the US oil industry and results in Trump’s “drill, baby, drill” agenda being rendered obsolete. Indeed, US shale oil producers are being doubly affected by the consequences of the trade war. On the one hand, the prospect of a slowdown in global oil demand is leading to a downward revision of oil price forecasts for the next two years. It is the Asian economies (excluding China) that drive global demand for oil, and they could be the most affected by the increase in US customs duties.
At the current price (USD 60-65/barrel Brent benchmark), we are certainly far from the breakeven point for US producers. According to the Federal Reserve Bank of Dallas, the price is just over USD 40 per barrel (the WTI benchmark is a few dollars lower than Brent). Nevertheless, shale oil production requires a continuous flow of investment to maintain production (proportionately more than conventional oil) and, according to the same source, the breakeven price for investment in new wells is around 65 USD/barrel. Furthermore, although a large proportion of the oil industry’s investment goods are produced locally, it needs steel, imports of which are currently taxed at 25%. This dual impact – slowing demand and rising investment costs – could bring a halt to the development of US production, at least in the short term.
Uncertain effectiveness of cartel policy
As far as OPEC+ is concerned, the situation is more complex. To understand the sensitivity of non-compliant producers to falling barrel prices, we need to look at budget dynamics. Despite the very high Kazakhstan’s fiscal breakeven (over USD 100/barrel, according to the IMF), its vulnerability to a fall in prices needs to be put into perspective. This high breakeven price is due to the relatively low share of oil revenues in total budget revenues and to a low “oil-rent rate” (the share of total oil export revenues that actually returns to the budget in the form of royalties, dividends and more). In addition, budget deficits are contained (a few percent of GDP in recent years) and easily financed by withdrawals from the sovereign wealth fund. On the Iraqi side, the situation is complex and visibility is poor.
Contradictory dynamics are at play between the central government’s willingness to maximise its main source of revenue, the uncertain recovery in oil exports from the Kurdish region and the US policy of sanctions against Iran, which could affect Iraq’s oil sector. Iraq’s fiscal sensitivity to falling prices is therefore uncertain.
OPEC+ could regain market share…
It is likely that beyond the very short term, the interests of the United States and OPEC+ will differ. Indeed, all other things being equal, the cartel’s continued release of even limited quantities of oil onto the market will push prices down. Before the start of the tariff war, the price of a barrel of oil was on a downward trend, with OPEC+ production stable. Consequently, an increase in supply would only accelerate this downward trend and put part of the US oil sector in difficulty. It is quite logical to conclude that OPEC+ would come out the winner from this episode, with the resulting increase in its market share. However, this argument quickly reaches certain limits, particularly budgetary ones.
… but lose cohesion
If prices were to fall too sharply, the cohesion of the cartel would be at risk. Russia, the biggest producer of the cartel but not the most disciplined, is increasingly vulnerable to a drop in oil prices. It is estimated that the Russian fiscal breakeven is 70 USD/barrel and that the government has only a limited amount of liquid assets to finance its deficit. Russia’s desire to move away from quota discipline could put a dent in the cartel’s cohesion. OPEC+’s second largest producer, Saudi Arabia, also needs high prices to finance the reform of its economy. Even taking into account the efforts being made to downsize infrastructure expenditures; the fiscal breakeven price is around USD 90/barrel and over USD 100/barrel if we include the capital expenditure of the Public Investment Fund (PIF).
A narrow path for OPEC+
The United States and OPEC+ have a common interest in lower prices in the short term. Beyond that, it seems that only OPEC+ members, by recovering market share, can emerge winners from the current upheavals in the oil market. US producers, who are facing a double shock in terms of demand and costs, will be in difficulty. However, even for OPEC+, the path is narrow and much of its success is based on the flexibility the cartel shows in its quota easing policy. Nevertheless, the main threat currently hanging over all oil producers, and one which could only result in losers, is the risk of a global economic recession which would cause oil prices to plummet for a long time.
Price forecasts revised downwards, but a floor exists
Against this backdrop, a measured OPEC+ policy (i.e. the cartel does not flood the market with its oil) and an economic slowdown that is limited both geographically and over time should enable the oil price to move into a range of USD 65 to 70/barrel in 2025, then USD 60 to 65/barrel in 2026. In this median scenario, the current downward trend is contained by the slowdown in US production (there is usually a 6–9-month lag between the price signal and its translation into volume) and the sanctions (direct and secondary) imposed by the United States on certain producers. A bullish scenario, which is unlikely at this stage, would be caused by an escalation in geopolitical tensions (particularly between the United States and Iran) and would temporarily push prices above USD 90/barrel. It should be noted that, until now, the risk premium linked to the sharp rise in tensions in the Middle East since the end of 2023 has been contained. Conversely, a global economic recession, or an uncontrolled policy of increasing production by OPEC+ members (who have large spare capacities that can be quickly mobilised) would cause the price of a barrel to plummet. By eliminating many non-OPEC+ producers, in such a scenario, USD 40/barrel would seem to be a first level of support.
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