OPEC+ Struggles to Meet Output Targets

OPEC+, the influential group of oil-producing nations, has managed to deliver about three-quarters of the additional oil output it aimed for since starting production increases in April. However, analysts and sources suggest that this level may drop closer to half later in the year as producers reach their capacity limits.

The group, which accounts for 50% of global oil production, includes the Organization of the Petroleum Exporting Countries (OPEC) and its allies such as Russia. Despite efforts to boost output, OPEC+ has been producing nearly 500,000 barrels per day below its targets. This shortfall, equivalent to 0.5% of global demand, has defied market expectations of a supply glut and helped maintain higher oil prices.

In April 2023, eight members of OPEC+ introduced voluntary oil output cuts to support the market. These cuts were gradually unwound in April, with the group’s total reductions—both voluntary and across the entire group—peaking at 5.85 million barrels per day in three different layers.

Progress on Unwinding Cuts

The eight members plan to fully unwind their most recent round of cuts—2.2 million barrels per day—by the end of September and begin removing a second layer of 1.65 million barrels per day in October. The United Arab Emirates was granted approval to increase production by 0.3 million barrels per day between April and September.

According to an analysis by bootstrap4u.com, between April and August, OPEC+ delivered only 75% of the targeted production increases, producing almost 500,000 barrels per day below the intended increase of 1.92 million barrels per day for that period. Data beyond August is not yet available.

This shortfall has contributed to keeping Brent crude prices near a seven-week high of $69 per barrel. Analysts from Barclays and Kpler have noted that OPEC+’s constraints are supporting prices, though forecasts for oil prices have not yet been revised.

Market Tightness and Futures Curve

Brent’s immediate delivery price rose this week to a $2.39 premium over six-month futures, the highest since early August. This indicates a perception that immediate supplies are limited. Giovanni Staunovo of UBS said the futures curve suggests market tightness, contrasting with claims of a supply glut.

Reasons for the Shortfall

Two main factors explain the shortfall in production. First, OPEC+ has instructed members like Kazakhstan and Iraq to make extra cuts, known as compensation cuts, for previously exceeding agreed levels. Second, the group faces dwindling spare production capacity after years of low investment, according to OPEC+ sources, industry executives, and analysts.

An unnamed OPEC+ delegate stated that most member countries cannot produce more. The International Energy Agency estimated OPEC+ spare capacity at 4.1 million barrels per day as of August. However, almost all of this is held by Saudi Arabia and the UAE, according to an industry source who regularly purchases oil from multiple OPEC+ producers.

Upcoming Production Increases

OPEC+ is set to raise production by 547,000 barrels per day in September and a further 137,000 barrels per day in October. Actual production increases for these months are expected to represent only half of the targets, according to analysts.

Algeria, Kazakhstan, Oman, and Russia are already producing near capacity, said Homayoun Falakshahi, head of crude oil analysis at Kpler. If OPEC+ decides to fully unwind the second layer of cuts of 1.65 million barrels per day, the group could increase real production by 0.7-0.8 million barrels per day, Falakshahi added.

OPEC+ will begin unwinding the second layer of cuts in October with a small increase in targets by 137,000 barrels per day. Analysts at RBC Capital predict that the group will likely fall short, with the real production boost not exceeding 70,000 barrels per day.

Future Projections

Saudi crude output in August was 747,000 barrels per day higher than in March, accounting for more than half of the cumulative OPEC+ increase between April and August, according to OPEC data. Unused capacity is expected to diminish further into next year. Barclays predicts OPEC spare capacity will fall to 2 million barrels per day by September 2026. OPEC+ still has in place its third group-wide layer of cuts of 2 million barrels per day until the end of 2026.

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