The OPEC+ group of oil producers celebrated its fifth birthday in early December. It’s been a turbulent period – more than they might have imagined when they first came together to face the threat posed by the US shale boom in 2016 – and the future doesn’t look very easy.
On the verge of collapse in 2020, OPEC+ was rescued from the need for a coordinated response to oil-supply management due to the COVID pandemic and the unprecedented drop in demand. They have risen to that challenge with remarkable solidarity. Their next stay together will continue as the world’s need for oil tests their production limits.
Oil prices plummeted, falling from $110 a barrel in mid-2014 to less than $30 in early 2016, and rising oil reserves, according to the parent Organization of the Petroleum Exporting Countries (OPEC). The 13 members of the U.S. agreed in November 2016. It called on non-member countries to produce oil to cut production by 1.2 million barrels per day and support them with additional cuts. A group of 11 countries, including the three largest ex-Soviet producers, Russia, Kazakhstan and Azerbaijan, agreed to reduce their collective production by about 560,000 barrels per day from the beginning of 2017.
That initial production cut was supposed to last until the end of June 2017. But it was extended not once, but twice. Then, at the end of 2018, it was deepened, and later expanded again. By March 2020, what was initially a six-month program of output restraint had lasted more than three years.
And then all of a sudden, it all blew up. As the COVID pandemic began to dent oil demand, Saudi Arabia demanded that Russia cut its proposed supply of another 1.5 million barrels a day. Russia postponed. OPEC+, as the broader group became known, fell apart.
These oil producers did not go their separate ways silently. Instead, they started a post-breakup fight by opening spigots and flooding the market with crude, just as lockdowns and international travel restrictions were slashing demand. Prices crashed again. That was enough to get them (virtual) around the table to agree to the deepest voluntary production cuts in April 2020. Since then his performances have challenged expectations (certainly mine and maybe even mine).
The group has shown great resilience in attempting to adjust its supply to evolving demand as the pandemic has subsided and increased over the past two years – even if they haven’t always got their calculations right. He delayed initial plans to ease production cuts, while Saudi Arabia automatically made additional cuts when demand slackened. Recently, he introduced a program to ease supply in the market as the recovery accelerated.
What’s even more surprising than flexibility is that manufacturers stick to what they say they will do. Certainly, there have been some that have helped incomplete compliance by unilateral Saudi cuts, maintenance interruptions in countries like Kazakhstan, and declining production capacity in countries including Angola and Malaysia. More importantly, there are global hopes that the deal will break as demand picks up.
The outlook for 2022 remains as uncertain as it has been this year. The pandemic is still with us. The emergence of another new variant in November has pushed oil prices down again as countries seek to contain its spread.
In the near future, the producer group is faced with a return to excess supply and an increasing need to cut production once again. At the same time, it is facing pressure from consumer countries worried about rising inflation, to keep the spigots open.
But assuming demand continues to improve, it won’t be long until the main concern is the group’s ability to pump all the oil the world needs, even as we attempt to transition away from fossil fuels. Russia’s second largest oil producer, Lukoil, says that if OPEC+ keeps adding 400,000 barrels a day every month, its excess capacity will be used up by April.
Saudi Energy Minister Prince Abdul Aziz bin Salman warned that the world would face a supply shortfall of 30 million barrels a day by the end of the decade. It is a lot, but he was right to do so. With many OPEC+ members already unable to meet their production targets and some other producers—including Russia—rapidly approaching full capacity, it may not take long for the group to struggle to add production, which The market will need to be balanced.
The next five years may not be easier for the oil producing group than its first five years.
Julian Lee is an oil strategist for Bloomberg First Word.
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