It was another good day at the office for oil bulls as the energy complex extended its positive start to the new year. Brent crude hit $82/bbl on Thursday and in doing so returned to its pre-Omicron levels. Alongside hopes that the Covid-19 variant will not badly hurt demand growth, price support came courtesy of Libya’s oil woes. A combination of civil unrest and maintenance to pipeline infrastructure has sent the country’s output down to 729,000 bpd from a high of 1.3 mbpd last year, according to the NOC.

Adding further impetus to the positive momentum was the spectre of supply disruptions in Kazakhstan. Deadly protests have struck the country’s main cities and there is some indication that it is spreading to the countryside. Such is the gravity of the unrest that the country’s leadership called on long-time ally Russia to send troops to help put down the deadly uprising. Thus far, there is no indication that Kazakhstan’s 1.6 mbpd of oil production has been significantly affected. Production at the country’s top three fields is said to be continuing. That said, production at Tengizchevroil, Kazakhstan’s largest oil venture, has been temporarily adjusted as a result of protests at the Tengiz field. Perhaps this is a prescient warning sign.

All the while, the feel-good factor was missing on Wall Street. Caution prevailed as anxiety over looming US interest rate rises gripped investors. Wednesday’s hawkish minutes of December’s Federal Reserve weighed on sentiment after suggesting that America’s central bank could raise interest rates sooner or faster than expected. Yesterday’s US jobless claims report showed that the number of Americans filing new claims for unemployment benefit has risen but remains near to pre-pandemic lows. All eyes will now be on today’s non-farm payroll report for further confirmation of a tightening US labour market. A strong number could be the final piece of the rate hike puzzle.

Broken promises

There was no New Year’s surprise for oil markets this week. As expected, OPEC+ stayed the course, approving a 400,000 bpd increase in production scheduled for February. Yet recent history has shown that increasing output is easier said than done. For the past few months, the OPEC+ alliance has persistently failed to pump as much as they pledged, with some members of the alliance struggling to raise oil production to the highest possible level allowed under the deal.

And sure enough, OPEC missed its oil production target once again in December, according to a Reuters survey. Under the OPEC+ deal, the ten OPEC members bound by the OPEC+ pact should be raising their combined production by 254,000 bpd each month out of the total OPEC+ monthly supply addition of 400,000 bpd. However, in December, OPEC-10 crude oil production increased by 150,000 bpd to 23.65 mbpd, according to the Reuters survey. Total production by the group’s 13 members rose by 70,000 bpd to 27.8 mbpd. Due to the lower-than-target production, compliance by the 10 OPEC countries participating in the production cuts jumped to 127 % last month, up from 120% in November, the Reuters survey showed.

The high compliance rate indicates that not all members of the pact were capable of raising supply as quickly as their quotas under the deal stipulates. Overcompliance was driven by the usual suspects including Nigeria. Africa’s largest producer has been constrained by infrastructure problems and sabotage incidents in recent months. Its output declined last month as shipments from Nigeria’s Forcados export terminal were halted. Angola’s production edged higher in December but remained in long-term decline. At the same time, production from Kuwait and Iraq was flat last month. Meanwhile, Saudi Arabia was responsible for the biggest increase, as has become the norm.

So, pumping levels within OPEC continue to be below the agreed goals. And now questions are being raised over Russia’s ability to ramp up output. Bloomberg reported that the country’s December oil and condensate output together totalled 10.903 mbpd, which was flat on November, suggesting it is nearing its limits. Moreover, in a further sign of stagnation, Russia is expected to pump and export lower volumes in the first quarter of this year. Exports and transit of oil from Russia are set to fall by 4% in the first quarter of 2022 compared to the fourth quarter of 2021, according to a quarterly export schedule seen by Reuters. The upshot is that Russia is highly likely to miss its target of returning to pre-pandemic levels of oil production by May this year.

Latest available data confirms a trend that began a few months ago—not all OPEC+ members have the capacity to pump to their full quotas. The alliance’s continued inability to deliver on its production target should act as a pillar of price support, especially as the Omicron factor subsides. However, the slow ramp up in production may also put it back in the firing line of the Biden administration. If the OPEC+ group continues to under-produce compared to its overall quota, it could leave the oil market tighter than previously forecast. Nevertheless, this shortfall will not threaten the supply surplus pencilled in for the first half of this year.