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

OPEC+ implemented production cuts in 2020 after a damaging Russia-Saudi Arabian price war at the outset of the COVID-19 pandemic accelerated a plunge in crude prices. The group last summer moved to unwind those cuts, boosting output in the 400,000 barrel-a-day increments, which are subject to approval at monthly meetings. On Wednesday, they did exactly that, agreeing to lift output by another 400,000 barrels a day in March.

OPEC+ has resisted calls by the U.S. and major oil-consuming countries to more aggressively lift production, prompting the Biden administration to coordinate a global release of strategic crude reserves last year that appeared to have only a fleeting impact, at best, on prices.

Now, with Brent crude BRN00, -0.20% BRNJ22, -0.20%, the global benchmark, trading near $90 a barrel — a threshold above which could lead to significant demand destruction, some market watchers saw incentive for OPEC+ to approve a bigger production boost, noted Edoardo Campanella, an economist at the Milan-based bank, ahead of Wednesday’s meeting.

Read: Why OPEC+ may not want $100 oil prices

But, as the chart shows, actual OPEC+ production in December was 790,000 barrels a day below target, the equivalent of nearly two months without boosting output. Or, as Campanella noted, “it is as if the cartel had paused its tapering of output cuts in both November and December.”

Those missing barrels are equal to almost 1% of pre-pandemic global oil output, the economist said. The biggest sources of the shortfall are Nigeria, which was 450,000 barrels a day below target, and Angola, which missed by 250,000 barrel a day.

Both countries are running out of spare capacity after years of underinvestment, Campanella said, which can’t be reversed quickly. He noted that Nigeria’s December target was 10% above its sustainable capacity, defined as production that can be sustained for a prolonged period, while Angola’s is 18% above what it can sustainably produce. The situation could also worsen for other countries, he added, noting that Russia should be producing 11 million barrels a day, but its capacity is just 10.6 million barrels a day.

All is not lost, however.

“An approach that would positively surprise markets and rein in prices would be if the cartel were to decide to assign quotas based on actual spare capacity rather than just announcing production hikes that cannot be achieved,” Campanella wrote.

Overall OPEC+ sustainable capacity stands at 4.9 million barrels a day, he said, which would be more than enough to satisfy the 3.3 million barrels a day of demand growth expected in 2022, even without a boost in U.S. output. The problem is that spare capacity isn’t evenly distributed within OPEC+, with almost 45% belonging to Saudi Arabia and around 25% belonging to the United Arab Emirates.

But there’s a rub. Such a proposal would likely be a source of diplomatic tension, the economist acknowledged, as other OPEC+ members would fear losing market share to the Saudis and UAE.

Oil futures moved modestly lower Wednesday, with Brent down 44 cents, or 0.5%, at $88.70 a barrel on ICE Futures Europe. West Texas Intermediate crude CL.1, -0.45% CL00, -0.45% CLJ22, -0.21%, the U.S. benchmark, fell 65 cents, or 0.7%, to $87.55 a barrel on the New York Mercantile Exchange, a day after logging the highest settlement value for a front-month contract since Oct. 7, 2014.