Oil Rises Another 3% as OPEC Holds Back on Significant Output Increases

By Barani Krishnan

Investing.com — OPEC+ has maintained a clear focus amid market fluctuations, successfully driving crude prices higher for four consecutive days, with a notable 3% increase on Monday. This rebound occurred despite an initial drop earlier in Asian trading, attributed to disappointing economic data from China, the world’s largest oil importer.

Brent crude settled at $114.24 a barrel, reflecting a $2.90 increase, or 2.4%, after dipping to $109 earlier in the session. Meanwhile, West Texas Intermediate (WTI) closed at $114.20, up $3.71, or 3.4%, bouncing back from a low of $106.28.

The shift in crude prices was prompted by statements from Saudi Arabia’s Energy Minister Abdulaziz bin Salman, who pointed out that a shortage of refining capacity in the U.S. and other regions would keep gasoline and various oil products expensive, even if crude output were increased. Fuel prices in the U.S. have surged to record levels, with gasoline surpassing $4.50 and diesel reaching around $6 at some fuel stations. The ongoing deficit in refining capacity, coupled with heightened demand as the summer travel season approaches, is driving energy prices to unprecedented heights.

Abdulaziz underscored a recurring theme from OPEC+, noting that "physical impediments that no producer can solve" are a significant factor in the current market dynamics. The OPEC+ alliance consists of 23 nations, including the original 13 members of the Organization of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia and an additional 10 countries, including Russia. They have committed to monthly production increases of just over 430,000 barrels per day, which falls well short of the demand surge of at least 3 million barrels, largely due to Western sanctions on Russia that have removed an equivalent volume from the market.

The U.S. is facing a critical squeeze on gasoline and diesel supplies, significantly influenced by the closure and reduction of several refineries during the pandemic. Remaining refineries are operating at limited capacity and are prioritizing profit over expansion, opting not to invest in increasing output or reopening idle plants that could alleviate pressure on consumers. These facilities continue to reap record profits under current conditions, creating little incentive to expand, given the lengthy time required for new refineries to become profitable.

According to Bloomberg, more than 1 million barrels per day of U.S. oil refining capacity—around 5% of the total—has been shuttered since the onset of Covid-19, which initially devastated oil demand in 2020. Additionally, outside the U.S., refining capacity has decreased by another 2.13 million barrels per day, as per estimates from the energy consultancy Turner, Mason & Co. Without plans for expansion on the horizon, the situation is expected to worsen.

"There is no refining capacity commensurate with the current demand and the expectation of the demand in the summer," Abdulaziz stated at an energy conference in Bahrain. His sentiments were echoed by Bahrain’s Oil Minister Sheikh Mohammed Bin Khalifa Bin Ahmed, who remarked, "There’s no new capacity coming. Even if you produce more crude, there isn’t demand for it, there aren’t any more refineries."