Why OPEC+ keeps agreeing to oil production increases it can’t meet

Demand “has recovered strongly from the lows of 2020 and oil prices have gushed higher, before surging again on the back of Russia’s invasion of Ukraine,” said Fawad Razaqzada, market analyst at City Index, in a note.

“Against this backdrop, you would think the OPEC+ would be keen to add oil more quickly than they have been doing so. Yet, they have continually refused to do that, while many members have been unable to ramp up their production to levels called for under the supply deal,” he said.

Tight spare production capacity for many members has been blamed for the inability to hit targets.

In One Chart: Why OPEC+ can’t hit its oil production targets — and what it could do about it (Feb. 2)

The group, which includes Russia, has resisted past efforts by the Biden administration and others to more quickly loosen the taps. That eventually prompted the U.S. and others to coordinate a historically large release of crude from strategic reserves as oil soared back above $100 barrel following Russia’s late February invasion of Ukraine.

So what gives?

Much of it has to do with Saudi Arabia, OPEC’s de facto boss and the world’s most important oil producer, which has acted on its own in the past to help balance markets.

In part, it’s about Saudi Arabia’s relationship with the U.S. The Wall Street Journal on Tuesday reported that CIA Director William Burns made an unannounced trip to the kingdom last month to meet with Crown Prince Mohammed bin Salman in an effort to repair ties with a key Middle East security partner.

The Biden administration at present doesn’t appear to be applying “serious pressure” to OPEC+ to use its remaining spare capacity to help contain prices, said Helima Croft, head of global commodity strategy at RBC Capital Markets, in a note.

“There seems to be a recognition of the fact that getting Saudi Arabia to act outside the established OPEC+ framework will require further progress in the bilateral conversation,” she wrote. “We continue to watch for a top of the house meeting between Washington and Riyadh as a sign that the relationship is on stronger ground.”

There also appears to be a reluctance by the Saudis to tap the country’s remaining spare capacity when significant uncertainty remains about how much Russian oil will ultimately be knocked off the market in response to efforts to ban imports of crude by the European Union, as well as self-sanctioning measures by oil traders.

Oil futures surged higher on Wednesday after the European Union announced a proposal to phase out Russian crude. July Brent crude
BRN00,
+4.75%

BRNN22,
+4.75%,
the global benchmark, was up 4.7% just shy of $110 a barrel on ICE Futures Europe, while June West Texas Intermediate crude
CL.1,
+5.21%

CLM22,
+5.21%,
the U.S. benchmark, was up 5.2% at $107.75 a barrel on the New York Mercantile Exchange.

The Saudis will likely continue to watch and wait until it’s more clear how willing Western leaders are to cut off Russian crude exports through embargoes and secondary sanctions, Croft said.

And then there’s the fear among Saudi oil experts that tapping spare capacity could backfire, she said.

“There also seems to be significant concern that if Saudi Arabia and the collective group exhausts their remaining 2-2.4 mb/d of spare capacity of this stage, market participants would pivot their focus on the absence of available barrels and prices would move higher,” she wrote. “In the run-up to the 2007- 2008 financial crisis, additional OPEC output action failed to halt Brent’s march to $147 a barrel.”