Downside risks to oil supply are intensifying

OPEC+’s reluctance to consider a more radical adjustment in its output policy this week raises the risk that production falls short of the group’s target this year. Admittedly, the group agreed to a further 400,000 bpd increase in output in March. But it has not hit this target for several months now; preliminary numbers for January show that OPEC members managed an increase of just 160,000 bpd. Therefore, to meet its targeted increase in production this year the group needs to consider further adjustments to its policy, such as tweaking the allocation of quotas between group members, for which it has so far shown little appetite. Together with the lacklustre rebound in US production, there is a growing risk that oil supply does not rise by as much as we expect this year. In turn, this adds to the upside risks to our forecast that the price of Brent crude will fall to $70 per barrel by year-end (from over $90 currently). With little in the way of major data releases next week, attention in commodity markets will be on any further ratcheting up of tensions between Russia and Ukraine. Were they to result in the choking off of energy supply from Russia to the rest of the world, this could exacerbate an already-undersupplied market and lead to a renewed surge in prices.