OPEC+ sticks with plans to pause output hikes in early 2026

Key Concepts

• OPEC Plus production strategy
• Global crude oil market surplus
• Market share vs. market flooding
• Forward curve (backwardation vs. contango)
• Geopolitical risk and oil prices
• Effectiveness of oil sanctions (Iran, Russia)
• Shaping markets vs. changing state behavior
• Iran's oil exports and sanctions
• Russia's oil exports and sanctions
• Global oil demand (100 million barrels/day)
• Emerging crude market surplus
• Geopolitical pressure and market imbalances
• Attacks on Russian export terminals
• US military assets in the Caribbean
• US-Venezuela relations and potential escalation
• Venezuela's oil exports and sanctions
• Preservation of energy infrastructure

OPEC Plus Production Strategy and Market Outlook

OPEC Plus is currently adhering to a plan to pause production increases during the first quarter of 2026. This decision is driven by indications of a surplus in the global crude market. The organization's strategy since April has been to increase production to regain market share while gradually easing the market management practices of recent years. However, OPEC Plus members have become cautious about the pace of bringing additional supply online, aiming to avoid pushing the market into oversupply. They are closely monitoring the supply-demand balance and the forward curve, which remains in backwardation. Backwardation suggests that there is still room for more supply in the market, as it has not yet flipped into contango (where future prices are higher than spot prices, indicating an oversupplied market).

Geopolitical Factors Influencing Oil Prices

Despite the potential for a surplus, geopolitical risks are exerting upward pressure on prices. The ongoing Ukrainian attacks against Russia, a member of OPEC Plus, are a significant factor. This dynamic suggests that while there appears to be space for OPEC Plus to continue increasing production, the decision to pause in early 2026 is a precautionary measure to assess the market's condition later in the year.

The Diminishing Effectiveness of Oil Sanctions

Gregory Brew, a senior analyst at Eurasia Group and author of "Why Oil Sanctions No Longer Work," discusses the evolving role of oil sanctions, particularly those imposed by the US on Iran and Russia.

Sanctions as Market Shaping Tools:

• Iran: US oil sanctions, in place since 2018, have effectively limited Iran's export market to a single customer, China. Despite this constraint, Iran has recently seen its oil exports exceed 2 million barrels a day, the highest level since sanctions were reimposed. This demonstrates that sanctions can shape market access, but not necessarily eliminate exports.

Sanctions as Tools for Changing State Behavior:

• Iran: The primary goals of sanctioning Iran's oil exports were to compel the country to cease support for regional proxies (like Hezbollah), abandon its nuclear program, and halt ballistic missile development. However, Iran has not complied with these demands and appears to be intensifying its actions, particularly in the aftermath of the conflict with Israel.
• Russia: Following the invasion of Ukraine in 2022, the US and EU have imposed increasing sanctions on Russia, including recent actions against Lukoil and Rosneft. The objective was to alter Russia's behavior regarding the war in Ukraine. However, there is no indication that President Putin intends to withdraw from Ukraine, suggesting that sanctions have failed in their intended purpose of changing state behavior.

Emerging Crude Market Surplus and Geopolitical Instability

Brew posits that a global crude market surplus is indeed emerging, with the primary uncertainty being its magnitude and the extent to which geopolitical factors might counteract it. The widespread prediction of a significant surplus in early 2026 is, paradoxically, contributing to increased geopolitical pressure.

Evidence of Emerging Surplus and Geopolitical Reactions:

• US Sanctioning Lukoil: This action can be seen as a response to market conditions.
• Ukrainian Attacks on Russian Export Terminals: These attacks in the Black Sea disrupt supply.
• Attacks on Russian Tankers: Reports indicate that at least three tankers linked to Russia's oil trade were struck by missiles or drones over a weekend.

These events suggest that the market is soft enough to absorb additional geopolitical risks and supply shocks. The projected 1.5 to 2 million barrels a day of excess supply in the first half of next year creates an imbalance that can amplify geopolitical tensions. This imbalance could lead to increased geopolitical events involving Russia, Venezuela, and potentially Iran, especially as the US considers actions against Venezuela and the unresolved issue of Iran's nuclear program persists.

US-Venezuela Relations and Potential Escalation

The situation with Venezuela is described as "bizarre," given that the US has been purchasing Venezuelan oil for years. The possibility of President Trump launching military action against Venezuela is discussed.

US Military Posturing:

• The US is amassing a significant number of military assets in the Caribbean, including an aircraft carrier, at least 10 surface vessels, and fighter squadrons.
• There have been attacks on boats allegedly transporting narcotics from Venezuela in recent weeks.
• While President Trump's rhetoric has been somewhat circumspect, and a call occurred between him and Venezuelan President Maduro, the signs point towards US preparation for escalation.

Impact on Oil:

• It remains an open question whether any escalation would directly affect oil.
• Chevron continues to operate in Venezuela, and the US still imports some Venezuelan crude, although approximately 85% of Venezuela's crude exports go to China, largely due to US sanctions.
• Brew argues that if the US escalates against Venezuela, it has an interest in avoiding strikes on energy infrastructure. This is because a successful campaign leading to regime change would necessitate preserving Venezuela's oil production and export capabilities for a new, potentially US-friendly government. Therefore, striking this infrastructure is considered unlikely.

Conclusion

The global crude oil market is at a critical juncture, balancing the fundamental pressure of an emerging surplus with heightened geopolitical risks. OPEC Plus's decision to pause production increases reflects an awareness of this delicate balance. While oil sanctions have proven effective in shaping market access, their ability to alter the state behavior of sanctioned nations like Iran and Russia is questionable. The increasing geopolitical activity around oil-producing nations, coupled with the potential for US escalation in Venezuela, underscores the volatility and interconnectedness of global energy markets and international relations. The key takeaway is the need to remain vigilant about both market fundamentals and geopolitical factors that will shape oil prices and supply in the coming months and years.