Opec+ loses oil market sway in Iran war as China gains influence

Six months into the Iran war, the world's most influential oil alliance, Opec+, finds itself in an unexpected situation: unable to exert influence over a market it once dominated. The conflict has severed a major route for Middle Eastern oil exports and damaged energy infrastructure in several Opec nations, causing its market share and pricing power to dwindle.

Its statements and policy decisions now have minimal impact on oil markets. Instead, a reduction in Chinese crude imports has emerged as a dominant factor in stabilizing oil markets, thanks to what analysts describe as the most severe supply disruption. Opec+, comprising the Organisation of the Petroleum Exporting Countries and partners such as Russia, once accounted for approximately 40% of global oil output in July, down from over 48% before the US and Israel targeted Iran in late February.

However, about four to five percentage points of the decline can be attributed to China's reduced oil imports. The war has diminished Opec+'s capacity to swiftly raise or lower supply by effectively blocking the Strait of Hormuz, a crucial export route for top Opec members like Saudi Arabia, Iraq, and Kuwait. Established in 1960, Opec expanded into Opec+ in 2016 when Russia and other countries joined forces to counter its shrinking share of global oil production.

Opec's share of worldwide crude output peaked at around 50% during the 1970s oil crises but fell to 30% by the 1980s as output from the North Sea, Alaska, and Siberia rose. Opec+ declined to comment on the Reuters request for information. Opec+ declares its decisions are aimed at maintaining market stability and not targeting specific oil prices.

Warfare-induced supply disruptions are not new to Opec, ranging from Kuwait during the 1991 Gulf War to Iraq following the 2003 US-led invasion. What is unusual this time is the scale of the outage, which is curbing multiple producers simultaneously, limiting the group's ability to compensate for losses elsewhere. Since March, the core Opec+ group has announced six oil output increases, yet most remain largely theoretical, given the Hormuz blockade, which has little effect on oil prices, except in July during a brief US-Iran ceasefire that temporarily reopened Hormuz.

The contrast with 2019 is striking. In that year, Opec+ and US President Donald Trump frequently disagreed over oil prices, and Opec+ decisions were closely monitored by traders for their potential market impact. At that time, the primary question was how much oil Opec+ would produce. Now, the focus is on how much oil can actually be produced and exported amidst a Middle East war.

A significant price driver this year has been a sharp decline in Chinese oil imports. Since the war began, China has purchased roughly 400 million fewer barrels of oil than during the same period last year, owing to a ban on fuel exports, lower refining output, and the increasing adoption of electric vehicles. This trend highlights China's growing role in balancing oil markets, a role previously dominated almost exclusively by Opec+ as the world's swing producer.