Why is OPEC struggling to raise oil output?
In our latest insight piece, we look at OPEC’s difficulties in meeting its oil production targets, and the outlook for oil production going forward.
When the Organization of the Petroleum Exporting Countries (OPEC) set a target to raise oil production by 648,000 barrels per day in July and August, we took the pledge with a pinch of salt. The bloc had for months failed to meet its previous, more modest target of a slightly more than 400,000 barrels-a-day increase: Official data shows that total output fell from 28.7 mbpd in April to 28.5 mbpd in May, before returning to 28.7 mbpd in June.
There are multiple reasons for the persistent undershoot. Sanctions are crippling the supply of oil from Iran and Venezuela. Production in Libya has been hit by sociopolitical unrest. More broadly, OPEC members’ energy sectors are suffering from underinvestment and supply outages.
In addition, political considerations may be playing a role. Current tight supply is helping buoy oil prices—which currently hover close to USD 100 per barrel—feeding through to improved fiscal and current account balances among members. With the global economy slowing, OPEC could be concerned that aggressive output hikes would weigh significantly on prices. Moreover, large output hikes could damage relations with Russia, which although not part of OPEC collaborates closely with the cartel on production quotas. Russia has a particular interest in keeping prices high, given that its own production is being crimped by Western sanctions.
Looking forward, OPEC members are likely to continue raising output gradualy. Over 2022 as a whole, production in key members will be up over 10% from 2021, providing an important economic boost. That said, the cartel’s headline targets are unlikely to be met, in the absence of significant sanctions relief for Iran and Venezuela. This will keep oil prices higher than they would otherwise be, feeding through to higher global inflation and interest rates.
- Insights from our analyst network:
On output from Libya and Iran, the EIU said:
“Supply growth by the OPEC+ group could be curtailed further if the situation in Libya does not improve in the short term. Increasing political polarisation is affecting the oil sector, and the National Oil Corporation (NOC) has declared force majeure at several major oilfields […] Oil production and exports will remain significantly reduced throughout 2022, with production averaging about 750,000-850,000 b/d as rival governments battle for control over Libya's main revenue source. […] We no longer expect Iran to strike a deal with the US later this year that would lift some curbs on production and exports. With this increased production from Iran no longer expected in the second half of 2022 and in 2023, this will further tighten a market that is struggling to make up for lost Russian output.”
On Biden’s trip to the Middle East, ING’s Warren Patterson said:
“All attention was on President Biden’s trip to the Middle East and specifically to Saudi Arabia. However, there was nothing definitive to take away from these meetings with regards to oil production policy. While comments from the US suggest that they believe that producers in the Middle East will take steps to increase output in the coming weeks, comments from Saudi Arabia were less optimistic. The Saudis have said that any changes in output would be done within the broader OPEC+ framework, and that the group would monitor the market and respond if needed. […] However, with the exception of Saudi Arabia and the UAE, there is little in the way of spare capacity amongst producers.”
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Author: Oliver Reynolds, Economist
Date: August 5, 2022
TagsAustralia interview Africa Eastern Europe Sterlin Base Metals Venezuela Ukraine Fed Canada Consensus Forecast Euro public debt Unemployment rate Economic Outlook USD UK Nigeria precious metals Precious Metals Commodities Germany Eurozone United Kingdom economic growth Major Economies Euro Area election Trade centralbanks Russia Turkey Cryptocurrency Cannabis Iran Tunisia Agricultural Commodities Portugal Commodities Draghi MENA Asian Financial Crisis Brexit Infographic Base Metals Commodities USA Healthcare European Union Energy Commodities Sub-Saharan Africa Greece Inflation scotiabank Exchange Rate Vietnam Argentina Canadian Economy chile WorldCup Economists Bitcoin Oil digitalcurrencies IMF CIS Countries TPP Dolar South Africa Interest rate India United States Economic Debt GDP Israel Brazil Central America Economic Crisis Palladium Copper Political Risk Investment Colombia Budget deficit Latin America oil prices Gold Company News Mexico Asia Government Bond G7 France Resource Curse Emerging Markets Asean OPEC Costa Rica; GDP; Budget Lagarde Japan Forex Italy Nordic Economies Housing Market China Economic Growth (GDP) TPI Spain ECB TPS Qatar Exports Banking Sector
We are pleased to announce that we have recently added European natural gas to our Commodities report. Annual and q… https://t.co/HmAFqBbf3k
14 hours ago
We invite you to watch our latest on-demand webinar, in which we examine the global economic outlook for 2023!… https://t.co/IUmG0H3YzF
2 days ago
Don’t miss this month’s most-read insight articles! ⭕️ The World's Fastest Growing Economies:… https://t.co/DT9WI6hhFU
3 days ago
In our latest insight piece, we look at how recent Covid-19 curbs and protests could affect China’s economy:… https://t.co/UT6OjQd68y
4 days ago
MENA's GDP growth in 2023 will ease to around the 10-year pre-pandemic average. Rate hikes, stagnating oil producti… https://t.co/kcPNGBXQcn
1 week ago