Published as part of ECB Economic Bulletin No. 7/2025.
The main factor behind the recent decline in oil prices is the change in OPEC+’s stance. (1) Oil prices have been trending downward in recent months due to two factors: weakening expectations for global demand after the US tariff announcement and OPEC’s unexpected decision to increase crude oil supplies (Figure A). (2) Traditionally, OPEC has played a stabilizing role in the oil market, with Saudi Arabia acting as a “swing producer” (3). Oil supplies have continued to increase since April 2025, despite already relatively low prices. In the past, OPEC’s decisions to increase supply appeared to be aimed at forcing member countries to comply with production quotas by allowing prices to fall, or to take back market share from non-OPEC producers. These same factors may also explain the group’s current behavior.
Chart A
Realized and planned oil production
(1 million barrels per day)
Source: International Energy Agency (IEA), OPEC, ECB staff calculations.
Note: This graph represents realized and planned crude oil production for eight major OPEC countries: Saudi Arabia, United Arab Emirates, Iraq, Kuwait, Algeria, Russia, Kazakhstan, and Oman. The dashed line represents the mitigation plan for oil production cuts from current OPEC production levels. The latest observations are from September 2025.
The current situation is similar to 2014, when oil prices fell sharply and sustainably due to changes in OPEC’s behavior during a period of low inflation. In late 2014, during the early days of the U.S. shale oil boom, cartels abandoned their traditional price-stabilizing role and repeatedly raised production levels to regain market share lost to U.S. producers. This change, combined with strong growth in U.S. shale production and weak demand, particularly due to a slowing Chinese economy, caused oil prices to fall by about 34% from October to December 2014 (Chart B). This sharp decline heightened the perception of deflationary risks, as inflation rates were already low in the United States and the euro area. Inflation expectations fell accordingly, with five-year inflation-linked swap rates in the United States and the euro zone falling by 29 basis points and 13 basis points, respectively.
Chart B
Crude oil price trends
(USD/barrel)
Source: LSEG.
Note: Latest observations are from September 17, 2025.
As in 2014, further increases in OPEC supplies could put downward pressure on oil prices. Nazer and Pescatori (2022) identify a number of important indicators that have historically been associated with cartels’ supply decisions. Comparing the current levels of these indicators to their levels in October 2014, then just before OPEC’s supply increase, provides useful insight into the group’s position in today’s oil market (Chart C). Taken together, these indicators suggest that OPEC has strong incentives to further increase production, and Saudi Arabia is likely to continue to stray from its usual role as a market stabilizer. Moreover, although Saudi Arabia is gradually regaining its market position, its share of global supply remains even lower than in 2014, while non-OPEC producers continue to expand their presence. Additionally, production quota compliance in cartel member states, particularly Iraq and Kazakhstan, is now slightly lower than in 2014, when it was already below the long-term average. In this context, Saudi Arabia may choose to further increase production in order to restore discipline within the group (4).
Chart C
Indicators related to OPEC supply decisions
(deviation from the standardized 2013-25 average)
Source: IEA, OPEC, LSEG, Morningstar, U.S. Energy Information Administration, ECB staff calculations.
Note: The indicator is expressed as the deviation from the standardized mean, calculated from monthly values from January 2013 to September 2025. OPEC non-compliance is calculated using the sum of the difference (if positive) between OPEC group-level quotas and realized production in 2014-16 and the positive deviation from OPEC countries’ national-level quotas in 2017-25, divided by the number of OPEC member countries. Member of OPEC+ at the time. Stocks refer to the proportion of OECD oil stocks to total world oil demand. The slope of the oil futures curve is an indicator of market tightness and is calculated as the difference between the oil spot price and the 12-month futures price. A positive slope indicates that the oil market is relatively tight. Variables marked with ‘*’ are multiplied by -1. This is because lower values of these variables correspond to a higher probability of OPEC supply increases. Latest observations are July 2025 for inventories and compliance violations, September 24, 2025 for oil futures, and August 2025 for global supply share.
OPEC’s actions can be modeled as those of a dominant oil producer competing with a price-driven supplier. To assess the impact of additional supply increases, we use an estimated dynamic general equilibrium model of the oil market that integrates the frameworks of Nakov and Pescatori (2010), Nakov and Nuño (2013), Filardo et al. (2020). This model includes three country blocks. One is the oil-importing region, which imports oil and produces collective goods. Competitive oil producing regions that determine prices in the oil market, such as shale oil producers. The other is the major oil-producing regions representing the OPEC cartel, which coordinates oil production to maximize its own profits and co-opts the reactions of the other two groups. Importantly, a cartel’s power is proportional to its market share. The larger OPEC’s share, the greater its ability to set price increases. (5)
If Saudi Arabia increases oil supplies further, oil prices could fall by another 10%, according to model-based estimates. We use our model to simulate how oil prices would change if Saudi Arabia supplied its full production capacity to maximize market share, regardless of other producers’ reactions or the prevailing price level. This change would both increase global oil supplies and reduce OPEC’s market power, thereby reducing the cartel’s ability to set price increases. Taken together, these factors will put downward pressure on oil prices. In this scenario, oil prices are expected to fall by about 10%. Based on current market data and assuming no additional shocks or policy intervention, oil prices are expected to be around $60 per barrel by 2027, below the level currently indicated by the latest oil futures (Chart D).
Chart D
Impact of 10% increase in oil supply by Saudi Arabia on crude oil prices
(USD/barrel)
Source: LSEG, Bloomberg Finance LP, ECB staff calculations.
Note: “Saudi Arabia Scenario” refers to a model-based simulation in which Saudi Arabia moves away from its traditional role as a “swing producer” and gradually increases oil production. “Latest Oil Futures” refers to the 10-day moving average of the latest available futures prices. “5th to 95th percentile” and “25th to 75th percentile” refer to the percentile of the option implied risk-neutral density of oil prices. These densities are centered around the latest available futures prices. The latest observations are from September 19, 2025.
However, several factors suggest that a sharp decline in oil prices like that seen in 2014 is unlikely. The 2014 price decline was driven by a combination of increased OPEC production and strong growth in non-OPEC supplies, with supplies increasing by 4.4% in the year, primarily from US shale oil. In contrast, current projections by the International Energy Agency predict that production growth in non-OPEC countries will remain modest in 2025 and 2026 (2.1% and 1.7%, respectively). This means that even if OPEC continues to lift production cuts, today’s global oil supply will not benefit from the same growth in non-OPEC production as it did in 2014. As a result, downward pressure on oil prices is likely to be less pronounced, especially as upside risks to prices from the Ukraine war and Western sanctions on Russian oil flows remain.
References
Filardo, A., Lombardi, MJ, 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”, Economic Journal, Vol. 123, No 573, December 1, pp. 1333-1362.
Nakov, A. and Pescatori, A. (2010), “Oil and the Great Moderate”, Economic Journal, Vol. 120, No 543, March, pp. 131-156.
Nazer, YF and Pescatori, A. (2022), “OPEC and the oil market”, IMF Working Paper, Vol. 2022, No. 183, October 5.
