OPEC+ output is coming back much quicker

Output from the Organization of Petroleum Exporting Countries is returning to the market faster than it did following the last two recessions, despite complaints that the cartel isn’t moving fast enough.

Things are moving faster this time. On Tuesday, OPEC+ agreed to hike output by 400,000 barrels per day. It has resumed two-thirds of the production that was halted when the pandemic hit in 2020, and the rest is expected by the middle of this year, according to the current schedule. That would put this post-recession recovery at about two years.

Oil consuming nations – led by the US and including China, India, and Japan among others – have publicly rebuked OPEC+, complaining that it’s taking too long to raise output in the face of surging energy prices. Those increases are driving inflationary pressures around the world and spurring central banks to reconsider their rate policies.

The cartel now expects a surplus of 1.4 million barrels in the first quarter due to weaker supply growth from rivals. But a potential repeat of the 2014 shale boom remains an ongoing risk. Despite American energy producers striving for capital discipline, and a more balanced approach to drilling and investment, capitalising on rising oil prices remains a temptation. It’s a sentiment shared by some of the world’s largest oil producing nations, several of which fell into budget deficits in 2020 because of the decreased crude revenues from a halted global economy.

But now, the petrodollars are rolling in. Saudi Arabia, for example, has a fiscal breakeven price of $78 per barrel of oil in 2021, according to the commodity information service S&P Global Platts. That’s expected to drop to $67 in 2022. Russia, the second largest oil producer, has a $69 breakeven rate, and it just needs prices to remain above $44 a barrel to profit this year.

Brent crude rose 50 per cent in 2021, its biggest increase since 2016. The boom is apparent in 2021’s best performing stocks – Devon Energy and Marathon Oil, which gained 193 per cent and 149 per cent, respectively. And investors expect oil to continue climbing, even in the face of a stronger dollar, with several strategists calling for prices above $100 per barrel.

However, risks remain. There’s potentially weaker demand from China thanks to its zero-Covid policy that could decelerate growth, nuclear negotiations with Iran, and the fallout from the Ukrainian conflict with Russia. Add in the possibility of new Covid variants and a European energy crisis that shows few signs of easing with winter underway, and it seems oil prices aren’t solely in the hands of OPEC and its partners.