- Representatives of the Organization of the Petroleum Exporting Countries and its allies have revealed that the alliance plans to fully restore the daily reduction of 1.65 million barrels by the end of September. However, due to the disruption of Persian Gulf shipping caused by the conflict between the United States and Israel with Iran, this increase in production is currently only nominal.
- The supply side has encountered historic disruptions, with the cumulative supply gap in the crude oil market exceeding 1 billion barrels. Saudi Arabia's daily crude oil production in April shrank significantly to 6.3 million barrels, the lowest since 1990, and production in core member countries like Kuwait has also been severely affected.
- There has been a significant shift in the internal structure of the oil-producing alliance, with the United Arab Emirates officially withdrawing from the organization due to disagreements over production benchmarks. This structural change not only reduces the existing production cut benchmark by 144,000 barrels unilaterally but also triggers a reevaluation of the long-term capacity accounting and coordinated pricing ability of the remaining member countries.
The Discrepancy Between Nominal Production Increase and Physical Supply Disruption
The global energy market is currently in a unique phase where paper quotas are severely disconnected from physical reality. According to the original plan of the Organization of the Petroleum Exporting Countries and its allies, the full restoration of the production cuts initiated in 2023 was intended to respond to demand recovery and moderately reclaim market share. However, geopolitical conflicts have posed a high risk of physical obstruction to the logistics channel of the Strait of Hormuz. Even if Middle Eastern oil-producing countries are allowed to increase daily production on paper, their crude oil cannot be safely and smoothly shipped to global consumption terminals. This passive reduction in production, caused by logistics disruptions rather than oil field depletion, renders the current nominal production increase targets as redundant data that cannot be fulfilled. Derivatives market traders have completely excluded this part of the fictitious capacity when pricing, opting instead to pay a high risk premium for spot crude oil for immediate delivery.
Geopolitical Conflicts Reshape the Crude Oil Supply Curve
The joint military actions by the United States and Israel against Iran have completely disrupted the existing balance of the global crude oil supply chain. The Persian Gulf, as the world's most important energy artery, has its transportation restricted, directly leading to a cumulative supply gap of over 1 billion barrels. From Saudi Arabia's daily production dropping to a low of 6.3 million barrels, the lowest since 1990, and Kuwait's output shrinking to a quarter of pre-war levels, it is evident that the supply curve of Middle Eastern crude oil has substantially shifted to the left. If the conflict does not show signs of easing in the third quarter, this short-term supply shortage caused by external shocks may gradually solidify into a structural supply bottleneck, forcing global refineries to accelerate the search for alternative oil sources from West Africa or the Americas.
UAE's Withdrawal and Quota System Restructuring
While facing the test of war externally, the Organization of the Petroleum Exporting Countries is also undergoing profound internal changes. The official withdrawal of the United Arab Emirates marks a critical point in the internal struggle over production benchmarks and capital monetization paths. The UAE has invested heavily in recent years to enhance its actual production capacity, but its capacity utilization has long been suppressed by the alliance's overall production cut framework. The country's withdrawal not only nominally removes about 144,000 barrels from the 1.65 million barrel production cut pool but also psychologically undermines the stability of the monopoly pricing alliance led by Saudi Arabia and Russia. The market will closely watch whether the UAE, after operating independently, will release idle capacity to compete for long-term purchase agreements with core Asian buyers.
Reevaluation of Future Capacity and the Mystery of Spare Capacity
Despite short-term production disruptions, the alliance is still advancing long-term capacity evaluation work for the 2027 quota calibration. Commissioning the American independent energy consulting firm DeGolyer and MacNaughton for auditing aims to establish an objective measurement benchmark for the actual capacity of each member country. However, conducting physical capacity audits in the current war-torn environment faces numerous technical obstacles. More importantly, this crisis has exposed the fragility of the so-called "spare capacity" in the global crude oil market. When core production areas are engulfed in war, even if there are vast recoverable reserves underground, as long as surface facilities and maritime channels cannot operate, this spare capacity cannot be converted into actual supply to stabilize oil prices. This requires consumer countries to redefine the baseline of their energy security reserves.
The Adverse Effects of Energy Premiums on the Global Macroeconomy
Crude oil inventories are declining at an unprecedented rate, pushing up the prices of refined products such as gasoline and diesel, injecting strong headwinds into the global macroeconomy. The surge in fuel costs not only directly increases the operating expenses of logistics and manufacturing but may also transmit to core price indicators through inflation expectations. As central banks in major economies attempt to find a balance between curbing inflation and avoiding economic recession, the loss of control over energy prices greatly compresses the room for maneuver in monetary policy. If high oil prices persist for a long time, it essentially equates to imposing a high "geopolitical tax" on global consumers, which will accelerate the arrival of demand destruction and increase the tail risk of the global economy falling into deep stagflation.
