OPEC+ oil ministers point to a massive surplus early next year as their justification for sticking to a plan of only modest production increases. But those forecasts are built on fanciful numbers — and they’re wrong.

It doesn’t matter which of the three oil market forecasts presented last week to the OPEC+ group you look at, they all show the same thing in different degrees: The current tight oil market will soon evaporate, to be replaced by one in which supply is running ahead of demand and global stockpiles are rising again. That switch, however, is based on highly inflated estimates of the group’s own future production.

In the most optimistic case, from the producer group’s point of view, a supply deficit of 2.7 million barrels a day in the third quarter of 2021 becomes a surplus of 2.5 million barrels a day in the first quarter of next year. Supply continues to run ahead of demand for the whole of 2022, returning global oil stockpiles to a level slightly above those seen at the end of 2020 by the end of the year.

Little wonder, then, that the producers are reluctant to heed calls from consumers to open the taps wider.

But these forecasts give an unrealistic picture for next year. And it is difficult to believe that this is simply a mistake, since it is the forecast of the group’s production that is most obviously at fault.

I don’t pretend to know any better than the forecasters at OPEC how strong oil demand will be next year. There are so many moving parts — including the gradual easing of travel restrictions, new outbreaks of covid infections and soaring energy prices — that demand forecasts are necessarily uncertain. So too are estimates of how much oil is being consumed now.

That’s less true of the outlook for production. 

By September the OPEC+ group of countries was pumping about 660,000 barrels a day below their target, with several member countries unable to meet their individual allocations and others limited by maintenance work.

And yet the OPEC supply-demand balance forecast assumes that the group produces in line with its target each month from October onward. That results in an implausible jump of 1.1 million barrels a day in the group’s output between September and October.

Conveniently, OPEC published its latest monthly report on Thursday. As expected, the increase from September was a fraction of that used in the forecast prepared for the ministers’ meeting. Crude production by the ten members of OPEC covered by the current output agreement increased by just 136,000 barrels a day from September to October, less than one-fifth of the jump assumed in the forecast.

Production by the three members exempt from the cuts — Iran, Libya and Venezuela — is estimated to have increased by 82,000 barrels a day, offsetting some of that shortfall, as their production is assumed to remain unchanged throughout the forecast. But it still leaves OPEC’s October output about 600,000 barrels a day below the forecast.

Persistent production shortfalls in countries like Nigeria and Angola are not the result of maintenance, as Saudi Energy Minister Prince Abdulaziz Bin Salman claimed after the OPEC+ meeting; rather, they reflect dwindling capacity resulting from lack of investment in exploration and development. So the shortfall will persist. In fact, it’s going to get worse, as more and more countries run up against capacity constraints and struggle to lift production.

Even if the producer group manages to add 400,000 barrels a day to supply each month from current levels, as it plans, the supply surplus next year will be much smaller than the OPEC+ forecasts suggests. If it adds much less than that, as it has done in recent months if you strip out the effects of maintenance, the surplus virtually disappears.

The oil market looks a lot tighter next year than producers would have you believe.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

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