Rising oil prices blamed in part on OPEC and Russian production shortfalls

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OPEC and its Russian-led partners have promised to boost oil production to pre-pandemic levels this year, but are failing to deliver on those public commitments, fueling booming global crude markets.

Last month, the Organization of the Petroleum Exporting Countries and its Russian-led allies increased their collective production by 250,000 barrels a day, or 60% of what the two groups had promised for the month, according to the agency. energy international. Overall, the group is pumping 790,000 barrels a day below its publicly stated targets, said the Paris-based watchdog, which advises industrialized countries on energy.

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

“These monthly [OPEC] the additions are increasingly nominal,” said Bill Farren-Price, director of intelligence at London consultancy Enverus. “They’re not fully supported by real barrels.” One of the factors pushing prices higher is “the concern that OPEC has very little wiggle room to offset any supply disruptions elsewhere,” he said.

Covid-19-inspired lockdowns made oil demand pale at the start of the pandemic. Now, however, as economies begin to hum again, demand is rising sharply. OPEC, in its latest market report, predicts that global oil demand will increase by 4.2 million barrels per day this year.

OPEC+ drastically cut production in early 2020 by 9.7 million barrels per day, or about 10% of global demand at the time. The group has since agreed to return 6.4 million barrels per day of those cuts. He promised to further increase production each month by 400,000 barrels per day until the group returns to pre-Covid-19 pumping levels.

In addition to rising demand, a number of geopolitical developments threaten to affect supply, fueling markets in recent sessions. Earlier this month, Yemeni rebels used drones and missiles to attack a UAE oil depot. Russia and the United States negotiated a de-escalation of tensions along the Russian-Ukrainian border, where Russian troops have massed. An invasion – or a drop in border tensions – could disrupt oil and natural gas shipments from Russia, one of the world’s largest producers.

In 2012, the Netherlands experienced a magnitude 3.6 earthquake. It was caused by one of the largest gas fields in the world, known as Groningen, and it triggered a series of events that contribute to today’s soaring energy prices. WSJ’s Shelby Holliday explains. Illustration: Sebastien Vega

Oil has risen sharply in recent months due to strong demand and supply concerns. Prices recently hit highs not seen in seven years.

Early Tuesday, Brent, the international benchmark, resumed its rise after a weaker session on Monday, boosted by rising tensions in Ukraine. In mid-morning trading in London, it was up more than 1%, above $87 a barrel. US crude was also higher, trading above $84 a barrel.

OPEC members such as Saudi Arabia and the United Arab Emirates typically invest in so-called idle capacity, which can be quickly activated to meet accelerated demand or replace barrels lost elsewhere. This cushion has widened during the pandemic, as producers have reduced production. As producers resume to meet demand, Morgan Stanley predicts global spare capacity will drop from 6.5 million barrels per day a year ago to less than 2 million barrels per day by mid- 2022. By then, the price per barrel will hit $100, Morgan Stanley said.

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

In December, Nigeria, one of Africa’s top producers, pumped 460,000 barrels a day below its quota, after a faulty barge triggered the closure of a major export terminal. In Angola, technical problems and a lack of investment have caused production to fall to its lowest level in 17 years.

Last month, Russia exceeded its OPEC+ quota for the first time since the group cut production. It had promised to increase production during the month by 20,000 barrels per day, but instead cut output by 10,000 barrels per day, the IEA said, blaming slower-than-expected development at some fields. A spokesman for the Russian Energy Ministry said it could not comment immediately.

The IEA has cut Iraq’s sustainable capacity estimates by 140,000 barrels per day due to persistent bottlenecks in aging infrastructure in the south. 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 destroyed by an explosion blamed on a falling pylon.

These and other hurdles make Saudi Arabia and the United Arab Emirates the only major global producers with significant spare capacity, around 3.25 million barrels per day, according to the IEA.

Despite the ability to pump more, the two producers do not plan to open the taps more widely and fill the gaps of other members. Saudi Arabia has publicly stated that it wants to set an example by meeting its agreed production cap. The kingdom has repeatedly lobbied other members who have 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 exceed its quota to make up for other members’ shortcomings. His Emirati counterpart, Suhail al-Mazrouei, said it was up to others outside the coalition to invest in bringing more barrels to market.

The two countries have also been reluctant to take unilateral action following a series of deadly battles within OPEC+, including a short-lived quota dispute between Saudi Arabia and the United Arab Emirates. last year. Just before the pandemic, Russia and Saudi Arabia were locked in a fierce price war, vying to outdo each other and steal market share after failing to reach agreement on a coordinated oil policy.

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

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