Investor Alert

London Markets Open in:

William Watts

Commodities Corner Archives | Email alerts

May 4, 2022, 1:30 p.m. EDT

Why OPEC+ keeps agreeing to oil production increases it can’t meet

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Crude Oil WTI (NYM $/bbl) Front Month (CL.1)

or Cancel Already have a watchlist? Log In

By William Watts

The Organization of the Petroleum Exporting Countries and its allies are expected Thursday to deliver yet another modest increase to their production target — and once again fail to meet it.

OPEC+ ministers are set to agree to lift output by 432,000 barrels a day in May, Reuters reported Wednesday, citing delegates. That would be in line with an agreement reached last year that has seen them lift output in similar increments on a monthly basis as it unwinds production cuts put in place in 2020 after the COVID-19 pandemic cratered demand.

Demand “has recovered strongly from the lows of 2020 and oil prices have gushed higher, before surging again on the back of Russia’s invasion of Ukraine,” said Fawad Razaqzada, market analyst at City Index, in a note.

“Against this backdrop, you would think the OPEC+ would be keen to add oil more quickly than they have been doing so. Yet, they have continually refused to do that, while many members have been unable to ramp up their production to levels called for under the supply deal,” he said.

Tight spare production capacity for many members has been blamed for the inability to hit targets.

In One Chart: Why OPEC+ can’t hit its oil production targets — and what it could do about it (Feb. 2)

The group, which includes Russia, has resisted past efforts by the Biden administration and others to more quickly loosen the taps. That eventually prompted the U.S. and others to coordinate a historically large release of crude from strategic reserves as oil soared back above $100 barrel following Russia’s late February invasion of Ukraine.

So what gives?

Much of it has to do with Saudi Arabia, OPEC’s de facto boss and the world’s most important 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 U.S. The Wall Street Journal on Tuesday reported that CIA Director William Burns made an unannounced trip to the kingdom last month to meet with Crown Prince Mohammed bin Salman in an effort to repair ties with a key Middle East security partner.

The Biden administration at present doesn’t appear to be applying “serious pressure” to OPEC+ to use its remaining spare capacity to help contain prices, said Helima Croft, head of global commodity strategy at RBC Capital Markets, in a note.

“There seems to be a recognition of the fact that getting Saudi Arabia to act outside the established OPEC+ framework will require further progress in the bilateral conversation,” she wrote. “We continue to watch for a top of the house meeting between Washington and Riyadh as a sign that the relationship is on stronger ground.”

There also appears to be a reluctance by the Saudis to tap the country’s remaining spare capacity when significant uncertainty remains about how much Russian oil will ultimately be knocked 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 surged higher on Wednesday after the European Union announced a proposal to phase out Russian crude. July Brent crude , the global benchmark, was up 4.7% just shy of $110 a barrel on ICE Futures Europe, while June West Texas Intermediate crude /zigman2/quotes/211629951/delayed CL.1 +1.44% , the U.S. benchmark, was up 5.2% at $107.75 a barrel on the New York Mercantile Exchange.

The Saudis will likely continue to watch and wait until it’s more clear how willing Western leaders are to cut off Russian crude exports through embargoes and secondary sanctions, Croft said.

And then there’s the fear among Saudi oil experts that tapping spare capacity could backfire, she said.

“There also seems to be significant concern that if Saudi Arabia and the collective group exhausts their remaining 2-2.4 mb/d of spare capacity of this stage, market participants would pivot their focus on the absence of available barrels and prices would move higher,” she wrote. “In the run-up to the 2007- 2008 financial crisis, additional OPEC output action failed to halt Brent’s march to $147 a barrel.”

US : U.S.: Nymex
$ 109.99
+1.56 +1.44%
Volume: 125,139
July 5, 2022 1:50a

This Story has 0 Comments
Be the first to comment
More News In

Story Conversation

Commenting FAQs »

Partner Center

About Myra Saefong

RSS News feed

Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the...

Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the bulk of her years at the company writing the daily Futures Movers and Metals Stocks columns and has been writing the weekly Commodities Corner column since 2005. Myra has been with MarketWatch since 1998 and holds a master’s degree in English literature.

More from Myra Saefong

Link to MarketWatch's Slice.