Crude prices trade higher today following a four-day slump after traders digested another bumper production increase from a group of eight OPEC+ producers. With the 2023 voluntary cut of 2.2 million barrels per day now fully reversed, traders ponder what the wider group might do with a 1.66 million barrels per day cut that was also implemented that year. So far, the group’s quest to regain market share from other producers has been successful, with prices holding up very well amid strong summer demand, and emerging signs high-cost producers, especially in the US, are pulling back with production seeing no growth for the past 18 months, currently stuck around 13.3 million barrels per day.
With OPEC+ prioritising market share through rising production keeping prices relatively low, thereby tipping the market into surplus, growth concerns in the US and China—exacerbated by protectionist policies and weakening trade flows—are putting a lid on consumption forecasts. A recent deterioration in US economic data, most notably last week’s dismal jobs report and yesterday’s ISM Services data, which showed firms are pulling back on hiring as costs rise, adds to broader macroeconomic unease, with stagflation concerns once again receiving a great deal of attention.
Secondary sanctions threaten Russian exports
Among the most significant bullish catalysts in recent days is the prospect of expanded US secondary sanctions targeting countries that continue to import Russian crude. President Trump has pledged to escalate penalties, raising tariffs on Russian oil buyers from 25% to potentially 100%, with India as a primary target.
These threats are already having an impact. Indian refiners are reportedly re-evaluating their Russian crude purchases, which could lead to significant disruptions. India has emerged as Russia’s largest crude customer since 2022, taking in around 2 million bpd. A meaningful drop in Indian demand for Russian oil would leave a large gap in the market and potentially tighten global supply, keeping prices supported. Thus, the geopolitical risk premium remains—for now—a strong counterweight to OPEC+ supply growth.
Diesel market tightness lends support
Adding to the price resilience is the continued tightness in global diesel markets. Inventories across key hubs—including the US, Europe, and Singapore—remain roughly 20% below their 10-year seasonal averages. The shortfall is linked to a combination of factors: reduced Russian diesel exports due to sanctions, limited refining capacity, and lower availability of medium-to-heavy crude grades suitable for diesel production. With industrial activity and transportation demand peaking in the Northern Hemisphere summer, refiners have struggled to keep pace.
This refined product tightness has helped maintain healthy crack spreads and indirectly buoyed crude oil demand, particularly for grades optimised for diesel yields. Speculators have responded accordingly and recently held net long positions in ICE gas oil and New York ULSD (Ultra-light Sulphur Diesel) near three-year highs. A potential risk once inventory levels normalise, potentially triggering a bigger-than-expected correction as longs are forced to exit.