OPEC’s plan to increase production actually has little to do with tariffs – by Ekaterina Zolotova for Geopolitical Futures – 09.04.25

Immediately after U.S. President Donald Trump announced his slew of tariffs last week, OPEC+ members, led by Russia and Saudi Arabia, announced a significant increase in oil production for May. At 411,000 barrels per day, up from a planned 135,000 bpd, this is the group’s highest output since 2020.

The move has little to do with the trade war; Russia was not targeted by tariffs at all (the sanctions regime against it practically brought trade down to zero), and the tariffs levied against Saudi Arabia, few as they were, excluded oil so as not to disrupt the U.S. energy market.

In fact, OPEC’s announcement was almost certainly made in concert with Washington, given their close interaction in recent weeks. Indeed, it may well be the beginning of concessions and mutually agreed actions meant to create a market that will suit everyone involved.

That’s not to say the new policy won’t be disruptive – even for Russia, Saudi Arabia and the U.S. The sharp increase in OPEC production and the tariffs from the U.S., especially against the backdrop of lowered demand from major oil importers in Asia, are shocks to the energy market.

Prices for Brent crude and WTI crude fell by $10 to $60-$65 per barrel over the weekend. Riyadh needs oil to be over $90 per barrel to cover government spending, so the current rates will force it to cut spending on several of its flagship projects.

Moscow needs all the money it can get to fund the war in Ukraine and to triage its economy. And the U.S., despite increased exports in recent years, needs oil revenue to reduce its trade deficit and maintain drilling (which $60-per-barrel prices allows it to do).

The only reason they would agree to goose production is that they see indirect benefits from lower prices. Immediately after starting his second term in office, Trump demanded that Saudi Arabia and OPEC reduce the cost of oil, in part to put pressure on Russia in Ukraine. Because this necessarily comes at the expense of long-term benefits, it’s likely that the call for low prices was meant to ease near-term inflationary pressure on U.S. consumers.

Lower oil prices could, in theory, help offset the growth of domestic food prices by reducing transport costs. And though it’s difficult to predict whether commodity prices will fall or how much savings will be generated if tariffs remain in place, the calculus U.S. leaders are making is that less money on gas means more discretionary income for consumers.

For Saudi Arabia, OPEC+ is the vehicle through which it manages global supply and demand, so it’s in Riyadh's interests to keep it buoyant and relevant. But more important, temporarily lowering oil prices can help eliminate competitors and rogue actors that ignore its oil dictates.

In Kazakhstan, for example, producers have recently increased production as part of a new expansion project for the Tengiz oil field, exceeding targets by as much as 300,000 barrels per day. And in Iraq, the government has no sign of implementing compensatory cuts for past overproduction. But the bigger target here is Iran, which Washington and Riyadh are clearly targeting.

Washington warned in February that it intends to dramatically reduce Iranian oil exports as part of the maximum pressure campaign against Tehran’s nuclear program. As always, what hurts Iran tends to help Saudi Arabia – economically and geopolitically.

Of the three, Russia's position in the oil market is the most shaky, though Moscow seems to be better prepared for price fluctuations this year than last: In the 2025 budget, oil and gas revenues was set at 10.9 trillion roubles ($126 billion), projecting an average annual oil export price of $69.70 per barrel. More, sanctions prevent Moscow from fully enjoying the benefits of high oil prices, and any major deviation from its projections will hurt its bottom line.

And the government will probably be unable to offset the drop in price with increased supplies since that, too, is constrained by sanctions. India, for example, has been a reliable oil buyer despite sanctions, but even it recently refused to accept a tanker carrying 767,000 barrels of Russian oil ostensibly for inadequate documentation.

And in late March, the vice president of Chinese company Sinopec Shanghai Petrochemical, which had also frequently defied sanctions, said the firm had reduced its oil purchases from Russia in the first quarter of 2025 after more than doubling purchases in 2024.

Despite the drawbacks, Moscow has had to become more accommodating to both OPEC and the U.S., thanks to the still unresolved conflict in Ukraine, the prospect of economic slowdown and the investment flight out of Russia. It seems as though Moscow agreed to more significant concessions in the oil market in exchange for, among other things, the return of several banks to the SWIFT system, the U.S.-Russia reconciliation and the negotiations on Ukraine.

Meanwhile, Russia is also interested in maintaining dialogue with Saudi Arabia. If sanctions are ever lifted, Russia will be able to sell oil freely again. Keeping the momentum toward negotiation and peace, then, requires market considerations for the Middle East. With prices as low as they are, Asian buyers will have no reason to open themselves to sanctions by buying Russian oil at a discount. Indeed, India's largest refineries recently announced they would look to the Middle East instead of Russia for raw materials.

Yet Moscow is confident it will maintain its share of the market because Arab countries can produce only so much before doing so contravenes their own imperatives. And in any case, Moscow has in place several long-term oil contracts that will continue to pay out, and it believes it will be able to make enough headway in Asian markets to stay afloat.

In fact, for the Kremlin there are several short-term benefits to lower oil prices. Its budget accounts for not only the price of oil but also the rouble exchange rate at which oil is traded – the average annual dollar exchange rate is 96.5 roubles. The recent strengthening of the rouble to 83 roubles per dollar reduces oil and gas revenues for the Russian budget. In this case, the weakening of the rouble, which is very sensitive to changes in the main export market, may actually work in Moscow's favour because it could soften the decline in oil prices and exports. Since OPEC’s announcement, the exchange rate has risen by only 2 roubles.

The U.S., Russia and Saudi Arabia believe whatever pain the announcement may cause will be short-lived. Gradual increases can always be suspended or canceled, depending on market conditions, to maintain oil market stability. Oil exporters likely expect this to be a typical bear market lasting at least two months and with a price drop of at least 20 percent. This could be long enough for the U.S. and Saudi Arabia to eliminate competitors but not long enough that they will suffer significant losses. It’s not without risk, but OPEC and the U.S. probably suspect that demand will, in turn, rise.

And in this regard, there is room to manoeuvre. The U.S. and Russia both expect domestic demand to grow, especially within the framework of an import substitution policy, which Moscow is forced to carry out in light of sanctions, and which the U.S. is trying to stimulate through protectionist policies. And despite the prevailing pessimism over reduced industrial production in China, the world’s largest oil buyer, exporters believe the rest of Asia will make up the loss in demand. After all, China will likely rebound in some form or fashion, and India alone is buying more oil at a colossal pace. And it’s not out of the question that both India and China take advantage of low prices by increasing their imports.

The oil market has already begun to recover from the initial shock of the OPEC announcement, and Brent and WTI futures have begun to grow. In general, the oil market remains uncertain amid the brewing trade war and slowed demand. However, the actions of the U.S., Saudi Arabia and Russia suggest that they have reached some understanding about prices. As negotiations continue, expect more concessions for favourable geopolitical outcomes.

https://geopoliticalfutures.com/oil-in-the-trade-war/

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OPEC’s plan to increase production actually has little to do with tariffs – by Ekaterina Z.

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Ekaterina Zolotova is an analyst for Geopolitical Futures. Prior to Geopolitical Futures, Ms. Zolotova participated in several research projects devoted to problems and prospects of Russia’s integration into the world economy. Ms. Zolotova has a specialist degree in international economic relations from Plekhanov Russian University of Economics. In addition, Ms. Zolotova studied international trade and international integration processes. Her thesis was on features of economic development of Venezuela. She speaks native Russian and is fluent in English.