Why OPEC+ keeps agreeing to oil production increases it can’t meet
The Organization of the Petroleum Exporting Countries and its allies are expected to deliver another modest increase in their production target on Thursday – and once again fail to meet it.
OPEC+ ministers are expected to agree to increase production by 432,000 barrels a day in May, Reuters reported on Wednesday, citing delegates. This would be in line with a deal struck last year that saw them ramp up production in similar increments on a monthly basis as it rolls back production cuts put in place in 2020 after demand cratered by the COVID-19 pandemic. .
Demand “recovered strongly from 2020 lows and oil prices soared, before recovering following the Russian invasion of Ukraine,” said Fawad Razaqzada, market analyst at City Index, in a footnote.
“In this context, one would think that OPEC+ would be keen to add oil faster than they have. Yet they have continually refused to do so, while many members have not been able to increase their production to the levels required under the supply agreement,” he said.
The low unused productive capacity of many members has been blamed for the inability to meet targets.
In a graph: Why OPEC+ Can’t Hit Oil Production Targets – And What It Could Do About It (February 2)
The group, which includes Russia, has resisted past efforts by the Biden administration and others to loosen the taps more quickly. This ultimately prompted the United States and others to coordinate a historically large release of crude from strategic reserves as oil rallied above $100 a barrel following Russia’s late invasion of Ukraine. february.
So what gives?
Much of it has to do with Saudi Arabia, the de facto boss of OPEC and the world’s largest oil producer, which has acted on its own in the past to help balance markets.
In part, it’s about Saudi Arabia’s relationship with the United States. The Wall Street Journal reported on Tuesday that CIA Director William Burns flew to the kingdom unannounced last month to meet Crown Prince Mohammad bin Salman in a bid to re-establish ties with a key insider. . East security partner.
At this time, the Biden administration does not appear to be putting “serious pressure” on OPEC+ to use its remaining spare capacity to help contain prices, said Helima Croft, head of global strategy. commodities at RBC Capital Markets, in a note.
“There appears to be recognition that getting Saudi Arabia to act outside the established framework of OPEC+ will require further progress in the bilateral conversation,” she wrote. “We continue to watch for a House summit meeting between Washington and Riyadh as a sign that the relationship is on firmer ground.”
There also appears to be a reluctance on the part of the Saudis to exploit the country’s remaining unused capacity amid significant uncertainty over how much Russian oil will ultimately be driven off the market in response to efforts to ban imports of crude by the European Union, as well as self-sanctioning measures by oil traders.
Oil futures jumped on Wednesday after the European Union announced a proposal to phase out Russian crude. July Brent crude BRN00,
the global benchmark, rose 4.7% just below $110 a barrel on ICE Futures Europe, while June West Texas Intermediate crude CL.1,
the US benchmark, rose 5.2% to $107.75 a barrel on the New York Mercantile Exchange.
The Saudis will likely continue to watch and wait until it is clearer to what extent Western leaders are willing to cut off Russian crude exports through embargoes and secondary sanctions, Croft said.
And then there is fear among Saudi oil experts that tapping into spare capacity could backfire, she said.
“There also appears to be a great concern that if Saudi Arabia and the collective group exhaust their remaining 2-2.4mb/d of spare capacity at this point, market participants would focus on no barrels. available and prices would rise,” she wrote. “On the eve of the 2007-2008 financial crisis, further production action by OPEC failed to stop Brent crude at $147 a barrel.”