OPEC+ has delivered about three quarters of the extra oil output it targeted since the group started production hikes in April, and the level may fall closer to half later in the year as producers hit capacity limits, sources and analysts said and data showed.
OPEC+, which produces 50 per cent of global oil and brings together the Organization of the Petroleum Exporting Countries and allies such as Russia, has been pumping almost 500,000 barrels per day below its targets. The shortfall, equal to 0.5 per cent of global demand, has defied market expectations of a supply glut and supported oil prices.
Eight members of OPEC+ that introduced voluntary oil output cuts in April 2023 to support the market began raising output this April. OPEC+ total reductions – voluntary and for the whole group – amounted at their peak to 5.85 million bpd in three different layers.
The eight plan to fully unwind their most recent round of cuts – 2.2 million bpd – by the end of September and start removing a second layer of 1.65 million bpd in October. OPEC+ gave the United Arab Emirates approval to boost production by 0.3 million bpd between April and September.
Almost 500,000 barrels per day below target
Between April and August, OPEC+ delivered only 75 per cent of production increases, according to a Reuters analysis of OPEC+ data, producing almost 500,000 bpd below the targeted increase of 1.92 million bpd for that period. Data beyond August is not yet available.
This shortfall has helped to keep Brent crude prices near a seven-week high of $69 per barrel. OPEC+’s constraints are one factor supporting prices, analysts at Barclays and Kpler said this month.
Analysts have yet to revise oil price forecasts.
Brent’s immediate delivery price rose this week to a $2.39 premium over six-month futures , the highest since early August, indicating a perception that immediate supplies are limited.
“The futures curve… is indicating market tightness, which is in contrast to observers claiming there’s a glut,” said Giovanni Staunovo of UBS, who is sticking with his latest price forecasts.
Most cannot pump more
Two main factors explain the shortfall. Firstly, OPEC+ told members including Kazakhstan and Iraq to make extra cuts, called compensation cuts, for previously exceeding agreed levels. Secondly, the group faces dwindling spare production capacity – idle output that could quickly come online – after years of low investment, said OPEC+ sources, industry executives and analysts.
One OPEC+ delegate, who declined to be named because of the sensitivity of the matter, said most member countries cannot produce more.
The International Energy Agency put OPEC+ spare capacity at 4.1 million bpd as of August. But almost all of that is held by Saudi Arabia and the UAE, said an industry source who regularly buys oil from multiple OPEC+ producers.
OPEC+ spare capacity and government oil stocks in the West and China serve as the world’s primary buffers against supply disruptions from wars or natural disasters.
Perceptions of falling spare capacity often unsettle markets, especially when OPEC+ raises production.
September, October hikes
OPEC+ is due to raise production by 547,000 bpd in September and a further 137,000 bpd in October.
Data for those months is not yet available but actual production increases will likely represent only half of targets, analysts said.
OPEC+ members Algeria, Kazakhstan, Oman and Russia are already producing near capacity, said Homayoun Falakshahi, head of crude oil analysis at Kpler.
The group is able to increase real production only by 0.7-0.8 million bpd if it decides to fully unwind the second layer of cuts of 1.65 million bpd, Falakshahi said.
OPEC+ will begin unwinding the second layer of cuts in October with a small increase in targets by 137,000 bpd.
The group will likely fall short and the real production boost will not exceed 70,000 bpd, analysts at RBC Capital said.
Saudi crude output in August was 747,000 bpd higher than in March, accounting for more than half of the cumulative OPEC+ increase between April and August, the OPEC data showed.
Unused capacity is set to diminish further into next year. Barclays predicts OPEC spare capacity will fall to 2 million bpd by September 2026. OPEC+ still has in place its third group-wide layer of cuts of 2 million bpd until end-2026.
