Oil prices plunge over 6% as OPEC surprises markets with May production hike

Oil prices slumped more than 6% on Thursday after the Organization of the Petroleum Exporting Countries stunned the market with their production increase plan for May. 

Eight members of the OPEC+ alliance in a ministerial meeting on Thursday decided to increase oil production by 411,000 barrels per day in May, according to an official statement. 

The right members, including Saudi Arabia and Russia, are scheduled to unwind some of its voluntary production cut of 2.2 million barrels per day in April.

This month, the cartel will increase oil output by 135,000 barrels per day after months of extending the voluntary production cuts. 

"This comprises the increment originally planned for May in addition to two monthly increments," OPEC said in a statement referring to the volume. 

Brent crude oil prices fell over 6% toward $70 per barrel after OPEC's latest announcement. 

The decline was further fueled by US President Donald Trump's tariff announcement, which had already pushed oil prices down over 4% earlier in the day. 

At the time of writing, the price of the West Texas Intermediate crude oil on the New York Mercantile Exchange was $66.65 per barrel, down 7.1%.

Brent crude oil on the Intercontinental Exchange was at $70.09 per barrel, down 6.5% from the previous close. 

OPEC’s supply cuts

In addition to the previously announced cuts, OPEC+ has maintained 3.65 million barrels per day of other output reductions. 

These additional cuts are set to remain in effect until the end of the following year, further supporting market stability and preventing oil prices from plummeting due to oversupply.

Analysts said that the decision on Thursday was partly due to OPEC+ leaders' desire to improve adherence to production quotas.

Excess oil output by Kazakhstan

Excess oil production in Kazakhstan has created tension within the OPEC+ group, causing discontent among other members, notably Saudi Arabia. 

This has led to calls from OPEC+ for Kazakhstan, along with other countries exceeding production quotas, to implement additional output cuts to offset the overproduction and maintain stability in the oil market.

Kazakhstan has consistently exceeded its oil production targets, as set by the OPEC+ agreement, over the past few months. 

This trend highlighted a divergence between the agreed-upon production levels and the actual output from the country. 

While some other OPEC+ members, including the United Arab Emirates, Nigeria, and Gabon, have also been observed producing above their allocated quotas, the extent of their overproduction is notably less significant than that of Kazakhstan.

The data released by OPEC reveals this disparity in production levels among the OPEC+ nations. 

Kazakhstan’s supply may fall

Kazakhstan's oil production and exports could fall this month due to Russia's order to shut down some export capacity on the CPC pipeline. 

This pipeline is the primary route for exporting oil produced in Kazakhstan by major oil companies, including Chevron and ExxonMobil from the US.

“They (eight OPEC+ members) also confirmed their intention to fully compensate any overproduced volume since January 2024 and to submit updated front-loaded compensation plans to the OPEC Secretariat by 15 April…,” the cartel said in its statement. 

Trump tariffs' effect on crude markets

The crude markets were already weak after US President Trump announced a 10% tariff on most US imports and higher tariffs on major trading partners on Wednesday. 

The White House said on Wednesday that oil, gas, and refined products were exempted from the new tariffs.

The United States imports most of its crude oil from Canada and Mexico. The US East Coast, with its limited refining capacity, imports a significant amount of its fuel from Europe.

“Energy imports are largely unaffected tariff-wise. But investors were reacting to the estimated damage these tariffs could do to global trade, and therefore global economic growth,” David Morrison, senior market analyst at Trade Nation, said. 

According to experts, the wide-ranging tariffs are expected to feed into higher inflation in the US, which could affect economic growth.