By Avi Salzman

Oil stocks dropped sharply on Monday after several members of OPEC and its allies said they expect to start raising production next month, which could push the market into oversupply this year.

It's a serious negative for the oil market, given that oil demand is rising too slowly to sop up all of the extra supply that could come onto the market over the next several months as countries such as Saudi Arabia boost production.

Oil stocks were already trending lower early in the day, in line with a broader market slump, but the energy selloff accelerated after 1 p.m. when the OPEC news came out.

Brent crude, the international benchmark, was down 1.6% to $71.62. The Energy Select Sector SPDR Fund dropped 3.5%, its worst showing since May 2023. Exxon Mobil fell 3.2% and Chevron dropped 3.5%.

OPEC and a companion group known as OPEC+ that includes Russia have been holding some of their production off the market since early in the Covid-19 pandemic to prop up prices. Today, the group is still holding more than six million barrels -- or more than 5% of global production -- off the market. It agreed in December to start bringing back some barrels of oil in April. Their announcement on Monday reinforced that decision.

Eight members of OPEC and OPEC+ will begin restoring production starting in April at a rate of about 120,000 daily barrels a month, and will continue adding production for 18 months -- all told, they will be adding about 2.2 million barrels over that period. That is on top of the production boost coming from other areas of the world, such as the U.S. and Brazil.

The U.S. Energy Information Administration has forecast the global oil market will be in oversupply by the second quarter of this year and stay that way through at least 2026.

In the next few years, OPEC and countries outside the alliance may have to fight for market share because oil demand isn't growing fast enough for everyone to raise production.

Bank of America strategist Francisco Blanch wrote last month that "oil use may struggle to grow above 1% annually" through 2030. Market share battles tend to lead to lower prices, which is what happened in 2015 -- a particularly bad year for oil stocks.

Write to Avi Salzman at avi.salzman@barrons.com

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March 03, 2025 17:16 ET (22:16 GMT)

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