OPEC+ targets show disconnect with pumping reality
Saudi pledge to keep output unchanged doesn’t reflect members’ abilities to produce that oil.
Out-of-Touch OPEC+
Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman is adamant that the current OPEC+ output targets, set in October, will remain in place until the end of the year. That shouldn't come as any great surprise.
Since the start of the recovery from the Covid-19 pandemic, we've become used to the producer group making monthly changes to its production targets. But that's unusual. What we're seeing now is simply a return to the group's normal operating practice.
After the financial crisis of 2008, for example, OPEC agreed on a collective output target of 24.845 million barrels a day. That figure remained unchanged for three years and was only revised after then-Saudi Energy Minister Ali al-Naimi emerged fuming from what he described as the worst-ever OPEC meeting in June 2011.
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The subsequent production ceiling of 30 million barrels a day remained in place for four years before being abandoned in favor of a free-for-all that heralded the creation of the OPEC+ group in 2016.
The problem faced by the producer groups — whether OPEC or OPEC+ — has always been to keep their output targets relevant.
Over long periods without change, the targets became meaningless, as some members flouted their individual allocations, while others struggled to pump as much as they were permitted.
The failure to revise targets in line with actual production, or the world's need for OPEC crude to balance supply and demand, could often be attributed to disagreements over how any changes should be allocated between members.
That same problem has reduced the relevance of the current OPEC+ target, with pro-rata increases over the course of 2021 and 2022 taking no account of members' abilities to actually pump at the levels allocated. The result is that the OPEC+ group is now pumping something like 3 million barrels a day below its notional target.
Perhaps we should worry less about OPEC+ intending to keep its output target unchanged this year and more about its lack of any real link to the reality of the group's actual production.
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Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies. @JLeeEnergy
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
