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.”