The OPEC+ group is expected to decide next week whether it should continue unwinding the oil production cuts by another 400,000 barrels per day (bpd) in March, as global demand holds resilient despite record COVID cases in major oil-consuming countries, OPEC+ delegates told Bloomberg on Wednesday.
The alliance is meeting online on February 2 to decide on production levels and quotas for March, having approved 400,000-bpd monthly production hikes each month since August.
For next week's meeting, expectations of OPEC+ delegates from around half of the coalition's producers are that the same increase will be approved for March, largely in line with analyst expectations that the group would continue to add more supply to the market.
Analysts, however, have started to point out that OPEC+ has been unable to deliver on the cuts each month since August, undershooting its collective target, which has essentially made market balances tighter than expected.
Even OPEC officials admit that OPEC+ will struggle to increase supply as much as the nameplate monthly increase allows, and prices could spike to $100 a barrel, some officials from OPEC producers have recently told Reuters.
The International Energy Agency (IEA) noted in its January monthly report last week that global oil supply inched up by just 130,000 bpd in December, to 98.6 million bpd, "as outages in Libya and Ecuador and a smaller than scheduled increase from OPEC+ wiped out much of the expected growth."
OPEC+ producers delivered total gains of 250,000 bpd last month, well below the allocated amount, and were 790,000 bpd below the group's target due to under-production in Nigeria, Angola, and Malaysia. For the first time since the cuts were introduced in May 2020, Russia also pumped below its quota, the agency said.
At the same time, OPEC's take on current demand suggests the market will absorb incremental barrels. The cartel said in its monthly report last week that the effect of the Omicron variant on demand had been weaker than expected a month ago, and the oil market is set to be well-supported throughout 2022 despite monetary tightening policies.
By Tsvetana Paraskova for Oilprice.com
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In the light of Brent crude hitting $90 a barrel today for the first time since 2014, some questions have arisen as to whether OPEC+ has enough spare production capacity to help balance the market in 2022. I believe it can to some extent with help from Saudi Arabia, Russia, UAE, Kuwait and Iraq but I doubt whether it can generate a spare capacity big enough to stem the continued surge of oil prices in the next few years particularly with the oil market entering a supercycle phase.
During the COVID onslaught, the overwhelming majority of OPEC+ members faced huge budget deficits and had to borrow great deal of money to stay afloat and after the oil price recovery they have been spending a lot of their oil export earnings on plugging their budget deficits. So they couldn’t spare money to invest in capacity expansion. Were they to start investing now , it will take them at least five years before they can add significantly to their capacity.
The supercycle and a limited global spare capacity are the right recipe for global oil prices to go beyond $120 a barrel within the next three years.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London