Shifts in OPEC+ behaviour and downside risks to oil prices

Prepared by Massimo Ferrari Minesso and Arthur Stalla-Bourdillon

A key factor behind the recent decline in oil prices has been the changing stance of OPEC+.^[1] Oil prices have been on a downward trend over the past months, driven by two factors: weakening expectations for global demand after US tariff announcements, and OPEC’s surprise decision to increase oil supply (Chart A).^[2] Traditionally, OPEC has played a stabilising role in the oil market, with Saudi Arabia acting as a “swing producer”.^[3] However, OPEC has continued increasing oil supply since April 2025, despite already relatively low prices. In the past, OPEC’s decisions to hike supply seemed to be intended either to enforce compliance with production quotas among its members by allowing prices to fall, or to regain market share from non-OPEC producers. These same factors may also explain the group’s current behaviour.

Chart A

Realised and planned oil output

(million barrels per day)

The current situation bears similarities to 2014, when shifts in OPEC behaviour led to a sharp and persistent oil price decline at a time when inflation was low. In late 2014, during the initial years of the US shale oil boom, the cartel abandoned its traditional price stabilising role and repeatedly raised output to regain market share lost to US producers. This shift, combined with strong growth in US shale production and weaker demand – particularly due to a slowdown in China – drove oil prices down by around 34% between October and December 2014 (Chart B). This sharp decline also raised perceived deflation risks, as inflation was already low in the United States and the euro area. Inflation expectations fell in tandem, with US and euro area five-year forward inflation-linked swap rates five years ahead dropping by 29 and 13 basis points respectively.

Chart B

Oil price developments

(USD per barrel)

As in 2014, further increases in OPEC supply could put downward pressure on oil prices. Nazer and Pescatori (2022) identify a number of key indicators historically associated with the cartel’s supply decisions. Comparing the current levels of these indicators with those of October 2014 – just before OPEC’s supply hikes at that time – can offer useful insights into the group’s position in the oil market today (Chart C). Taken together, these indicators suggest that OPEC has strong incentives to further increase production, with Saudi Arabia likely to continue deviating from its usual role as a market stabiliser. Moreover, although Saudi Arabia is gradually regaining its market position, its share of global supply remains even lower than it was in 2014, while non-OPEC producers have continued to expand their presence. And compliance with production quotas among cartel members, in particular by Iraq and Kazakhstan, is currently slightly weaker than it was in 2014, when it was already below the long-term average. In this context, Saudi Arabia may opt to raise output further to restore discipline within the group.^[4]

Chart C

Indicators associated with OPEC’s supply decisions

(deviation from standardised 2013-25 mean)

OPEC’s behaviour can be modelled as that of a dominant oil producer competing against price-taking suppliers. To assess the impact of additional supply increases, we use an estimated dynamic general equilibrium model of the oil market, integrating the frameworks of Nakov and Pescatori (2010), Nakov and Nuño (2013) and Filardo et al. (2020). The model includes three country blocs: an oil-importing region, which imports oil and produces aggregate goods; a competitive oil-producing region, such as shale oil producers, which acts as a price-taker in the oil market; and a dominant oil-producing region, representing the OPEC cartel, which adjusts oil production to maximise its own profits and internalises the reactions of the other two groups. Crucially, the cartel’s power is proportional to its market share – the larger OPEC’s share, the greater its ability to set a price markup.^[5]

Model-based estimates indicate that if Saudi Arabia were to further increase oil supply, oil prices could decline by an additional 10%. Using our model, we simulate how oil prices would change if Saudi Arabia supplied oil to its full production capacity to maximise its market share, irrespective of other producers’ reactions or prevailing price levels. This shift would lead to both higher global oil supply and reduced market power for OPEC, thereby lowering the cartel’s capacity to set a price markup. Together, these factors would exert downward pressure on oil prices. Under this scenario, oil prices are projected to fall by around 10%. Based on current market data and assuming no additional shocks or policy interventions, this would place oil prices around USD 60 per barrel by 2027 – below the levels currently indicated by the latest oil futures (Chart D).

Chart D

Oil price effects of a 10% increase in oil supply by Saudi Arabia

(USD per barrel)

However, several factors suggest that a sharp oil price decline, similar to that seen in 2014, is unlikely. The 2014 price drop was driven by a combination of increased OPEC production and strong non-OPEC supply growth, which rose by 4.4% that year – mostly because of US shale oil. In contrast, current projections by the International Energy Agency expect only moderate production growth from non-OPEC countries in 2025 and 2026 (2.1% and 1.7% respectively). This implies that even if OPEC were to continue unwinding its production cuts, global oil supply today would not benefit from the same non-OPEC production growth as it did in 2014. Consequently, the downward pressure on oil prices is likely to be less pronounced, all the more so as upside risks to prices stemming from the war in Ukraine and from Western sanctions on Russian oil flows persist.

References

Filardo, A., Lombardi, M.J., Montoro, C. and Ferrari Minesso, M. (2020), “Monetary Policy, Commodity Prices, and Misdiagnosis Risk”, International Journal of Central Banking, Vol. 16, No 2, March, pp. 45-79.

Nakov, A. and Nuño, G. (2013), “Saudi Arabia and the Oil Market”, The Economic Journal, Vol. 123, No 573, 1 December, pp. 1333-1362.

Nakov, A. and Pescatori, A. (2010), “Oil and the Great Moderation”, The Economic Journal, Vol. 120, No 543, March, pp. 131-156.

Nazer, Y.F. and Pescatori, A. (2022), “OPEC and the Oil Market”, IMF Working Paper, Vol. 2022, No 183, 5 October.