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OPEC+ Underproduction Is Pushing Oil Prices Higher

The compliance of OPEC+ producers with their output cut surged in January, suggesting that the gap between nominal monthly output quotas and actual supply to the market continued to widen.

OPEC+ members complied with a massive 129 percent of the production cuts last month, an OPEC+ source told Reuters on Monday. That’s up from 122 percent compliance in December and a compliance rate of 117 percent in November.

In January 2021, OPEC producers’ compliance jumped to 133 percent, while the non-OPEC members of the OPEC+ pact had their overall compliance rate at 123 percent, the source told Reuters.

As oil prices rally in a tight market with a geopolitical risk premium, the widening gap between what OPEC+ has to produce on paper and the reality of oil output is pushing prices higher.

For half a year now, OPEC+ has actually added lower volumes to the market each month than the 400,000 bpd nominal monthly increase announced in each of the OPEC+ meetings since August 2021.

Estimates in the International Energy Agency’s monthly oil market report for February showed that the gap between OPEC+ production and its target levels surged to as much as 900,000 bpd in January.

“If the persistent gap between OPEC+ output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on prices. But these risks, which have broad economic implications, could be reduced if producers in the Middle East with spare capacity were to compensate for those running out,” the IEA said.

Last week, the IEA’s executive director Fatih Birol urged OPEC+ twice in one week to narrow the widening gap between its production quotas and the much lower actual supply to the market.

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On Sunday, the energy ministers of the biggest oil producers in the Middle East, including Saudi Arabia, Iraq, Kuwait, and the UAE, said that OPEC+ should stick to the plan to raise production by 400,000 bpd each month despite calls to boost supply more to cool oil prices.

By Tsvetana Paraskova for Oilprice.com

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