OPEC’s Capacity for Confusion
OPEC+’s process of re-estimating member production capacities and baselines has the potential to fundamentally alter the producer group’s output trajectory next year
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It’s time for a new set of OPEC+ member production baselines, the reference or benchmark against which production cuts are calculated; in most cases, these baselines are more than a half-decade stale.
Upwards of a ~600 kbpd group-wide net baseline upgrade is on the line, which could, theoretically, translate into a higher crude production target with the UAE providing the lion’s share of incremental output.
But OPEC+ math is equal parts druidic science and ad-hoc political artistry, with notable questions remaining around both the UAE’s current production and current baseline calculation—leaving upside and downside potential in terms of the ramifications of this baseline recalculation process on realized global supply.
OPEC+ has embarked on an audit process that will see member production baselines—or “reference production levels” in current official OPEC parlance, the reference or benchmark against which cuts are calculated—updated based on revised independent output capacity estimates. Why recalculate baselines? Because, in most cases, these baselines were based on October 2018 production levels, and are thus more than a half-decade stale. (Yes, it also pains me to note that 2018 was more than a half-decade ago.) A lot can and, in this case, has changed over that long a stretch, and many OPEC+ members’ oil industries bear increasingly little resemblance to the capabilities reflected in late-2018 performance.
But, while, on paper, this process sounds straightforward, the political reality is sure to be anything but. The baseline revision has the potential to materially shift the output trajectory of the producer group next year: the arcane system determines the rough guidelines governing production levels across a membership that represents roughly half of the world’s crude output and a straight baseline adjustment would all but certainly mean increased production. Then again, OPEC+ math is equal parts druidic science and ad-hoc political artistry. At the end of the day, OPEC+ will decide what it means for 2025 output targets and it can cherry pick from two contradictory baseline revision precedents over the past two years.
The audit process is set to finish at the end of June; however, it’s quite likely that we won't hear those results for many more months—possibly nearer the end of the year if 2023’s baseline revision process can serve as any kind of example. Nonetheless, let’s take a look at what those baseline revisions could be, where member baselines stand today, and what it all means for OPEC+ production next year.
Terminology Note: OPEC math is filled with many different words that mean overlapping things and are often confusingly used interchangeably. With regards to the current conversation, two key terms benefit from explicit definition. In this report, I’ll be referring to OPEC “baselines” (or as OPEC has recently come to call them “reference production levels”, which is the level against which committed cuts are measured to reach so-called “production targets” (previously known as “quotas”).