The Iran war has laid bare deep fractures within OPEC, the world’s most powerful oil cartel, pushing it toward a pivotal moment that could determine its future. As the Strait of Hormuz gradually reopens after months of conflict, member nations are scrambling to restart production, reigniting long-simmering disputes over quotas and strategy.
In April, the United Arab Emirates, a key OPEC member, exited the group. Now Iraq, the bloc’s second-largest oil producer, is threatening to follow suit unless its production targets are raised dramatically. Iraq’s oil output plummeted by 75% during the war, falling to just over 1 million barrels per day in April and May from more than 4.5 million barrels per day earlier in the year. The country is seeking permission to pump a record 5 million barrels per day, with long-term ambitions of reaching 7 million barrels per day.
Saudi Arabia, OPEC’s dominant member, holds the key to the cartel’s survival. Unlike Iraq and Kuwait, Saudi Arabia was able to maintain much of its production during the war by bypassing the Strait of Hormuz via pipelines to the Red Sea port of Yanbu. As a result, the kingdom has less incentive to ramp up output and risk driving down prices. “In this situation, it seems counterproductive to flood the market and push prices lower,” said Dan Pickering, founder and chief investment officer at Pickering Energy Partners.
The cartel faces a delicate balancing act. If it increases production too quickly before global demand recovers, it could trigger a price crash. JPMorgan’s head of global commodities strategy, Natasha Kaneva, warned of “the risk of a temporary glut as trapped oil finally re-enters a system that has already spent months learning how to function without it.” Some analysts predict oil prices could fall to $60 a barrel next year and as low as $50 by 2028.
While lower prices would benefit consumers, they would severely strain the finances of OPEC members that rely on oil revenue. The cartel could also face competition from the United States, which has emerged as a potent oil producer. However, OPEC has weathered internal dissent before. “Iraq has outlined targets to raise production capacity multiple times before, without much success,” noted Kieran Tompkins, senior climate and commodities economist at Capital Economics.
Yet the extraordinary circumstances of the Strait of Hormuz lockdown may force Saudi Arabia’s hand. In a worst-case scenario, the kingdom could choose to flood the market and drive prices down to $40 a barrel—a level only the wealthiest producers could endure. As Vikas Dwivedi, global oil and gas strategist at Macquarie Group, put it: “It would be bitterly ironic if we went from the biggest supply shock ever to a historic supply glut.”
