That OPEC’s spare oil production capacity was a problem that was only going to get worse over time became clear last year when the first reports began to emerge that the cartel and its partners led by Russia are not adding as much oil to their monthly production as agreed. . Today, the gap between commitment and production has widened, adding fuel to an already strong price rally.

In December, OPEC+ added 253,000 barrels per day to its combined production, well below its target of 400,000 bpd for another consecutive month of growth. Naturally, this has fueled concerns about global supply security amid the International Energy Agency’s forecast that demand for oil will exceed pre-pandemic levels later this year.

This latest prediction could be confusing to many who follow the agency’s results. In December, the IEA said oil demand growth would slow this year. He also forecast possible oversupply in the oil market for the current quarter, citing the effect of the Omicron variant on fuel consumption and higher non-OPEC production.

To be fair, the agency noted that oversupply would materialize if several things happened, including Saudi Arabia and Russia pumping at record rates as “remaining OPEC+ cuts are fully reversed.” . Yet he seems to have vastly underestimated the resilience and strength of demand. No wonder many other forecasters are talking about oil hitting and breaking $100 a barrel.

“These monthly [OPEC] the additions are increasingly nominal,” Bill Farren-Price, chief intelligence officer at consulting firm Enverus, told The Wall Street Journal this week. “They’re not fully supported by real barrels.”

“Oil has had a remarkable run in recent weeks, driven by very bullish fundamentals as disrupted supply struggled to keep up with strong demand,” OANDA principal analyst Craig Erlam told City AM.

“OPEC and the IEA have referred to the resilience of demand since the emergence of omicron in recent weeks and the inability of OPEC+ to meet, or even come close to, their production targets. has led to the type of one-sided price action that we have been witnessing,” Erlam added.

Morgan Stanley’s Martijn Rats said in a note to clients that Brent crude could hit $100 this year in the second quarter as global crude inventories decline and investment in new production remains limited. He added that the high prices could also persist next year.

Not everyone believes oil will hit $100, regardless of all the bullish factors currently in play. Saxo Bank’s Ole Hansen, for example, told City AM that the momentum behind rising oil prices is slowing. and that we might see a correction soon. Regarding tensions in Ukraine, which were also cited as factors pushing oil higher, Hansen noted that they were more likely to affect natural gas prices if they escalate rather than oil prices. .

Regardless of the immediate future movements in oil prices, the fact remains that OPEC and Russia and their Central Asian partners do not appear to be able to meet their production quotas for reasons ranging from political unrest in Libya to technical problems in Nigeria and dwindling reserves. capacity in Russia and most OPEC countries.

The strength of oil demand seems to have been systematically underestimated by some forecasters, which could increase the potential for higher prices, and not only in the short term. More upside potential will come from the other looming problem in the oil industry: not enough investment.

Saudi Arabia and the former OPEC secretary general warned that underinvestment would come to bite last year. At the time, most forecasts were betting on a steady decline in demand for oil as low-carbon energy took center stage, but the reality turned out to be different, and that’s not only a matter of time before the spotlight is shone on the world’s increasingly limited oil production capacity. .

Morgan Stanley expects global reserve oil production capacity to drop from the current 6.5 million bpd to just 2 million barrels per day by mid-year. This would be the result of increased production by OPEC and its partners in accordance with their agreement to return to pre-pandemic production levels. And that fall in spare capacity, according to the investment bank, would push Brent to $100 and beyond.

Yet the problem of underinvestment is more serious because it actually means that there are fewer opportunities to expand this shrinking unused productive capacity. Just as a few years ago the market worried about the rate of replacement of Big Oil’s reserves, now it’s starting to worry about the ability of the industry as a whole to produce as much oil as the world. still needs it despite the energy transition.

OPEC does not want $100 oil. Some cartel officials have said so. Excessively expensive oil is not good for exporters because it dampens demand. But this time around, there seems to be little OPEC can do about it except hope that demand doesn’t rise too fast too soon for prices to remain relatively unchanged from where they are now.

By Irina Slav for Oilprice.com

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