Oil Price Spike: OPEC+ Must Manage Shift From Lack of Demand to Lack of Supply


The oil market is rapidly shifting from a period of over-supply during the height of the pandemic to one of potential shortage. Producers who managed the slump now need to be diligent in managing the recovery.

The oil producing countries in the OPEC+ group — led by Saudi Arabia and Russia — have done an amazing job at managing oil supplies as demand has crawled its way back from the biggest collapse in history.

Sure, they got off to a shaky start. Instead of slashing supply as demand cratered in April 2020, they boosted it in a production free-for-all after their previous cooperation fell apart. The deal that emerged when they eventually got together took days to form and almost foundered on the unwillingness of Mexico to play its part.

But after some vague pledge from President Donald Trump that the U.S. would make up the cuts that Mexico refused, the producer group announced a record output reduction of almost 10 million barrels a day. And, for the most part, it has stuck by what it promised.

Sticking to the Deal

Even without the extra Saudi cuts, compliance has been close to 100%

Source: OPEC

As always, there are those who haven’t done all they pledged. Some, most notably Russia, have been given a free pass. Others, like Iraq, Nigeria and most visibly the United Arab Emirates, have been called out and persuaded to compensate with even deeper cuts. Saudi Arabia twice made additional unilateral reductions to its production to speed up the process of market rebalancing.

Demand is now well on the road to recovery — literally. Highway traffic is back at, or even above, pre-pandemic levels in the U.S., China and large parts of Europe. Domestic and regional aviation is also picking up. The number of passengers passing through security at U.S. airports surpassed 2 million a day for the first time since March 2020, while European air traffic has risen by one-third in the past month. The remaining weak spot is long-haul flying, which is still constrained by restrictions on incoming passengers in many parts of the world.

Flying High

For the first time since March 2020, the number of passengers flying in the U.S. has exceeded 2 million twice this month

Source: U.S. Transportation Security Administration

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