A decision by OPEC+ to increase production and Donald Trump’s latest tariffs blitz have combined to sink oil prices to three-year lows.

The oil price has fallen more than 3 per cent this week and more than 6 per cent over the past seven days, with the internal politics of OPEC+ and Trump’s tariffs helping to deliver the lower prices that Trump demanded from the oil cartel at the World Economic Forum in Davos earlier this year.

The sharp fall in the oil price this week to below $US70 a barrel is due to OPEC+’s announcement on Monday that, after three years of production cuts that removed about 6 million barrels a day (about 6 per cent) from global oil supplies, the cartel would start returning some of that withheld production to the market.

From next month, OPEC+ producers will add 138,000 a barrels a day and then continue to lift output in monthly increments until September 2026, by which time about 2.2 million barrels a day of supply will have been brought back into the market. The group does, however, reserve the right to pause or reverse the increases, depending on market conditions.

While OPEC+ might be seen to be acceding to Trump’s demands, and that might indeed be a factor – particularly for the cartel’s leader, Saudi Arabia, which has a close relationship with the US president – there are other factors at play.

OPEC+ has had difficulty maintaining discipline, with various members of the group producing above their quotas during the period of the production constraints. Recently, Kazakhstan, the United Arab Emirates, Russia and Iraq have been increasing their production – Kazakhstan to record levels – undermining the cap on output.

Trump wants lower oil prices. He may not, however, like what comes with them.

There’s little sense in maintaining the cap if some of the key members are ignoring their commitments.

It’s also the case that the attempt to push the oil price towards the $US90 or so a barrel that the Saudis, who have borne the brunt of the production curbs, need to balance their budget hasn’t worked, while there has been an immense opportunity cost to the producers from taking 6 million barrels a day out of the market.

Even as OPEC+ members have produced well below their capacities, non-aligned producers, particularly the US producers, have significantly increased their output. The US has been producing at record levels and was expected to set more records this year even before Trump unveiled his “drill, baby’drill” plan to promote the sector.

OPEC+ has, therefore, been steadily losing market share and would have continued to do so if it retained the production cuts. The decision to bring back production can therefore be seen as an attempt to protect and perhaps recover market share.

Adding to supply in a market where supply is already expected to be in excess of demand – the International Energy Agency has forecast a surplus of supply over demand of more than a million barrels a day this year – is, however, a recipe for lower prices.

That’s a double-edged sword for Trump, who wants lower prices and higher US production.

US shale oil producers are highly sensitive to financial returns and can dial up or down their production quite rapidly. They won’t increase output into a falling market just to protect their market share.

It is conceivable, however, that the Saudis expect Trump to help them out.

Last month, Trump revoked a licence held by Chevron to operate in Venezuela that enabled it to export more than 200,000 barrels a day of Venezuelan crude, or about a quarter of the country’s output. That oil can no longer flow to the US, which may see some or all of it taken out of global supply.

In a presidential memorandum last month, Trump also said that the United States will deny Iran “all paths to a nuclear weapon” and directed the Treasury Department to “impose maximum economic pressure on the Iranian regime”.

That campaign will include “driving Iran’s export of oil to zero,” the memorandum said.

Iran has been producing at a rate of more than 4 million barrels a day, with most of its exports (1.6 million barrels a day last year) going to China.

If the US succeeds in driving a significant volume of Iranian and Venezuelan oil out of the market, it would create room for OPEC+’s increased output.

In a market that’s already unbalanced, however, that would require relatively solid global growth, and Trump is doing his best to ensure that doesn’t happen.

Trump’s tariffs on everything and everyone are already having an impact on economic conditions in the US and elsewhere, as well as on the oil market more directly.

It was notable that the most recent slump in the oil price started on February 27, which is when Trump announced the 25 per cent tariffs on steel and aluminium, two of the key inputs to global economic activity.

US consumers are already unsettled and cautious and wary of the prospect that Trump’s tariffs will drive US inflation higher and growth and incomes lower, while the subsequent tariffs on Canada, Mexico and China, followed by Canada and China’s retaliation, are spreading the trade contagion internationally and exacerbating the economic damage.

There are more tariffs to come, on Europe and the rest of the world, with Trump’s reciprocal tariffs – tariffs that match those of other countries and which will also include a calculation of non-tariff policies that the US (wrongly) considers discriminate against US products, like value-added taxes – due to come into force next month.

While Trump said during his address to Congress this week that his tariffs would cause “a little disturbance” but that “it won’t be much,” his trade wars, particularly the effective doubling of tariffs on China, will have a greater impact than he appears to believe.

Instructively, within 24 hours of his tariffs on Canada, Mexico and China going live, the White House was forced to pause the levies on automobile imports for a month after US carmakers told the administration they could add 25 per cent to the cost of US cars.

The industry is, as a result of the free trade agreement between the US, Canada and Mexico, highly integrated, with supply chains that shuttle components back and forth across their borders. Tariffs on the sector would cause more than “a little disturbance” for the car companies, their suppliers, their employees, their customers and the US inflation rate and economy.

China is the biggest contributor to global growth, but its reliance on exports makes it peculiarly vulnerable to Trump’s tariffs.

While it has reduced its direct exports to the US by re-routing them through other countries within the Asia Pacific region and, to a degree, Mexico and South America, the nature of the trade war Trump has started means that won’t insulate it from the impact of his tariffs.

If China’s economy slows, or its composition changes to reduce its reliance on exports – and there were indications at this week’s National People’s Congress that that is what it plans – its demand for commodities, including oil, will also fall.

A full scale escalating global trade war – China and Canada have already retaliated, Mexico says it will, Europe has also said it will respond with tariffs and trade restrictions of its own if targeted by the US, and Trump has vowed he will respond to retaliation with even more tariffs – would inevitably damage global growth and flow through to the demand for oil.

Trump wants lower oil prices. He may not, however, like what comes with them.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.