OPEC+ Is Being Way Too Optimistic About Its Supply Targets

(Bloomberg Opinion) -- As a new month comes into sight, so too does another meeting of the OPEC+ group of oil producers, who are seeking to balance the oil market by gradually adding back the supply they removed almost two years ago in response to the first wave of Covid-19.

With one or two notable exceptions — the November gathering that saw the group refuse customers' requests for a bigger-than-planned output increase being the most obvious — the virtual get-togethers have become almost routine, with the biggest surprises they have generated being their brevity.

Don't get me wrong, I'm all in favor of a few unexciting meetings.

The group is expected to agree to add another 400,000 barrels a day to supply in March — they already have a similar increase agreed for February — but are likely to fall even further behind their target when it comes to actual production. They've been struggling to keep pace with their plans to increase supply since first adopting them. Actual increases have lagged behind the target in three of the five months so far.

They got off to a poor start, adding just 94,000 barrels a day in August, thanks in large part to maintenance work that slashed production in Kazakhstan. Things picked up after that, but by the end of the year they had only added about 1.8 million barrels a day out of a pledged 2 million barrels.

That may not sound like a big deal. But timing is everything.

September's bigger-than-promised increase wasn't enough to offset the previous month's shortfall, which has effectively rolled through the entire period. If you look at how much crude the group pumped in total between August and December, the shortfall against its pledged output is nearly 110 million barrels, almost enough to meet the combined consumption of Europe's two biggest oil users — Germany and France — for a month.

OPEC+ production has been running at least 640,000 barrels a day below target since July. 

By December, the 19 countries with output targets collectively pumped 740,000 barrels a day less than they had pledged. And the gap is likely to widen again in January, and probably in February, too.

The biggest under-achiever in terms of keeping pace with allowed increases may come as a surprise — Russia. Of the 525,000 barrels a day that it was allowed to add to production between July and December, Russia added only 372,000 barrels. Nigeria is running a close second, having seen its production fall by 40,000 barrels a day over the 5-month period, when it should have increased by more than twice that amount.

The slowdown in Russian output growth brought its production below its OPEC+ target in December for only the second time since the cuts were introduced in May 2020. Does this reflect a newfound sense of responsibility? Or does it, as many suggest, indicate the country is struggling to add back the barrels it took off the market nearly two years ago?

The jury is still out. We saw a similar slowdown in Russian output growth between April and June, only for production to resume its upward path from July. But now Russia's oil companies are pumping much closer to their pre-pandemic peak output levels, the country has more wells operating than at any time since April 2020, and operators including Lukoil PJSC have said that they will soon use up all their spare capacity.

For many other OPEC+ countries, the outlook is clearer. They, just like their counterparts outside the group, have experienced a collapse in the investment needed to maintain production capacity, to say nothing of expenditure to boost it. As a result, most would be unable to reach pre-pandemic production levels even if all restrictions were removed.

So what will happen on Wednesday? In all likelihood, OPEC+ producers will agree to add another 400,000 barrels a day to supplies in March. We will continue to pretend to believe them. And their actual production will slip even further behind their goal.

More from Bloomberg Opinion:

• Russia's Oil Weapon Is More Potent Than Gas: Meghan O'Sullivan
• Coal Is Still Golden and Net Zero Is Far Away: Javier Blas
• Dude, Where's My Oil? (And Why Is It So Expensive?): Julian Lee

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

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