Oil Price Rise Blamed in Part on OPEC, Russian Output Shortfalls

The shortfalls have softened the market effect of a series of steady increases in oil output that the two groups, known together as OPEC+, have announced in recent months: Instead of curbing prices, the group’s inability to increase as promised has become a reason for traders to bet on higher prices.

“These monthly [OPEC] additions are increasingly nominal,” said Bill Farren-Price, director of intelligence at London consulting firm Enverus. “They are not fully backed by real barrels.” One factor in pushing prices higher is “the concern that OPEC has very little scope to make up for any supply disruptions elsewhere,” he said.

Covid-19-inspired lockdowns sent oil demand swooning early in the pandemic. Now, though, as economies start to hum again, demand is climbing sharply. OPEC, in its latest market report, forecast global oil demand to increase by 4.2 million barrels a day this year.

OPEC+ cut its production deeply in early 2020 by a collective 9.7 million barrels a day, equivalent to about 10% of global demand at the time. The group has since agreed to restore 6.4 million barrels a day of those cuts. It has promised to further increase output each month by 400,000 barrels a day until the group is back at pre-Covid-19 pumping levels.

In addition to rising demand, a number of geopolitical developments threaten to hit supply, stoking markets in recent sessions. Earlier this month, Yemen rebels used drones and missiles to attack a United Arab Emirates oil depot. Russia and the U.S. have been negotiating a de-escalation of tensions along the Russia-Ukraine border, where Russian troops have massed. An invasion—or lower tensions on the border—could disrupt oil and natural gas shipments from Russia, one of the world’s biggest producers.

Oil has risen sharply in recent months on strong demand and worry over supply. Prices recently hit highs not seen for seven years.

Early Tuesday, Brent crude, the international benchmark, resumed its climb higher after a weaker session Monday, boosted by rising tension in Ukraine. In London midmorning trading, it was up more than 1%, above $87 a barrel. U.S. crude was also higher, trading above $84 a barrel.

OPEC members such as Saudi Arabia and the U.A.E. typically invest in so-called spare capacity, which can quickly be turned on to meet accelerated demand or replace barrels lost elsewhere. That cushion expanded during the pandemic, as producers dialed back output. As producers ramp back up to meet demand, Morgan Stanley forecasts the world’s spare capacity will shrink from 6.5 million barrels a day a year ago to below 2 million barrels a day by mid-2022. By then, the price of a barrel will rise to $100, Morgan Stanley said.

OPEC is currently producing 2.5 million barrels a day less than just before it started cutting in early 2020. But several members are struggling to add back their share of the group’s pre-pandemic output.

In December, Nigeria, a top African producer, pumped 460,000 barrels a day below its quota, after a malfunctioning barge triggered the shutdown of a major export terminal. In Angola, technical issues and a lack of investment have sent production to 17-year lows.

Last month, Russia pumped below its OPEC+ quota for the first since the group cut output. It had promised to boost output in the month by 20,000 barrels a day, but instead cut output by 10,000 barrels a day, the IEA said, blaming slower-than-expected development of some fields. A Russian Energy Ministry spokesman said he couldn’t immediately comment.

The IEA cut Iraq’s sustainable capacity estimates by 140,000 barrels a day due to lingering bottlenecks in aging southern infrastructure. Pipelines are frequently targeted by insurgents or fail due to lack of maintenance. In the most recent outage, a key oil pipeline to Turkey was knocked out by an explosion blamed on a falling pylon.

Those and other obstacles leave Saudi Arabia and the U.A.E. as the world’s only major producers with sizable spare capacity, about 3.25 million barrels a day, according to the IEA.

Despite the capacity to pump more, the two producers aren’t moving to open taps wider and make up the shortfalls from other members. Saudi Arabia has said publicly it wants to set an example by complying with its agreed production ceiling. The kingdom has repeatedly put pressure on other members that had produced above their quotas in the past.

At an energy conference this week, Saudi energy minister Abdulaziz bin Salman said it would be unfair for the kingdom to breach its quota to make up for other members’ shortfalls. His Emirati counterpart, Suhail al-Mazrouei, said it was up to others outside the coalition to invest to put more barrels on the market.

Both nations have also been reluctant to take unilateral action following a string of bruising battles within OPEC+, including a short-lived dispute over quotas between Saudi Arabia and the U.A.E. last year. Just before the pandemic, Russia and Saudi Arabia were engaged in a fierce price war, vying to outpump each other and steal market share after failing to reach an agreement on a coordinated oil policy.

Write to Benoit Faucon at [email protected] and Summer Said at [email protected]