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- Oil prices have climbed even after OPEC+ announced a bigger boost to oil production this month.
- Members of the oil group have been struggling to meet output targets after underinvesting, experts told Insider.
- “The market is questioning whether the OPEC countries can actually meet the call for higher production.”
Oil prices have climbed about 5% since OPEC+ backed a bigger output increase last week, and analysts say there is little the cartel can do to bring them down soon.
The oil group said it would boost supplies by 648,000 barrels a day in July and August, up from its prior monthly increases of about 400,000 barrels a day. But even that small uptick is unlikely to reach the market.
“The challenge has been that a lot of the OPEC countries have been authorized to ramp up oil production, but they haven’t been able to meet their previous production quotas,” Rob Thummel, managing director and portfolio manager of Tortoise Capital, told Insider. “The market is questioning whether OPEC countries can actually meet the call for higher production.”
In particular, smaller OPEC+ countries have been missing their quotas in recent months, leaving the group roughly 2.6 million barrels a day below its goal output, S&P Global said.
The problem is that when OPEC slashed production after the pandemic initially sent demand crashing, investment also fell off and facilities weren’t maintained very well. That has made ramping up output more difficult.
In addition, top OPEC members exported 900,000 fewer barrels per day in May versus February, Matt Smith, lead oil analyst at Kpler, told Insider. Even if energy leaders Saudi Arabia and Kuwait ramp up production, they will use much of those barrels domestically, as they typically do during summer months, he said.
“So OPEC+ may be talking about higher production, but the likelihood of those barrels hitting the market via exports is pretty unlikely,” he said.
All this adds further strain to the IEA’s forecast that the world will be without 3 million barrels a day from Russia soon, which has created a “geopolitical premium,” according to Thummel.
No relief in sight
With little help coming from the supply side, the demand side will add extra upward pressure to oil prices too. Bank of America expects prices to hit $140, and global commodities trader Trafigura predicts $150.
Once China fully curbs its strict COVID policies, demand will soar even higher, meaning oil prices are still nowhere near their peak, Suhail Al-Mazrouei, the United Arab Emirates’ energy minister, said Wednesday.
Meanwhile in the US, demand remains strong as summer driving and travel season kicks off despite record prices. Americans are paying at least $5 for a gallon of gas in more and more states, and prices at the pump are up roughly 60% from a year ago, per AAA data.
The oil market may settle down if OPEC+ can move to eventually boost supply more meaningfully because, Thummel believes, it could improve the security and reliability of global supplies.
“Some forecasts say prices could hit $150 a barrel, and I think that’s a possibility this summer,” Thummel said. “But once you get more oil production, then we’ll see some relief. And I do believe longer-term oil prices will come down to more reasonable levels.”
Smith, however, isn’t certain that oil markets will see relief, and said the main way prices could fall is if demand destruction occurs. Unlike 2008, the crisis now is driven by dwindling global supplies.
“We have Russian barrels coming off the market, OPEC struggling to increase production, the US unable to increase production — if the supply side is unable to help bring prices down, we have to look to demand,” Smith said.