OPEC+ Nears Its Limit, Leaving Prices One Crisis Away from a Spike
Spare capacity, as defined by the International Energy Agency (IEA) is “capacity levels that can be reached within 90 days and sustained for an extended period.”
Spare Capacity May Be Overhyped
The IEA, in its latest monthly report, estimates that the total OPEC+ spare capacity is 4.05 million bpd, including 2.43 million bpd in Saudi Arabia, 850,000 bpd in the UAE, and 320,000 bpd in Iraq. All other OPEC+ producers are maxed out.
But after several years of reduced production levels, it’s not certain how much even Saudi Arabia could bring within three months should a supply shock hit the market.
In November, Saudi Arabia’s production quota will be 10.06 million bpd.
Saudi Arabia says its total sustainable production capacity is 12 million bpd. However, it pumped 12 million bpd only once in its history, for one month in early 2020 during the price war with Russia, before COVID sank consumption and forced major output cuts from the OPEC+ group. The Saudis have pumped 11 million bpd or more only for short-lived periods of time in 2018 and in 2023.
Based on precedents, Saudi Arabia’s current spare production capacity is likely only between 600,000 bpd and 1 million bpd that can be brought up quickly and sustained for a period of time, according to estimates by Reuters’ energy columnist Ron Bousso.
Right now, apart from Saudi Arabia and the UAE, the other OPEC+ producers do not have spare production capacity, which limits the upside to their production in the coming months, despite the fact that the group has extended the reversal of the cuts into October and November.
OPEC+ delegates told Bloomberg last month that they expect about half of the headline output hikes to be delivered going forward, due to compensations for overproduction and a lack of spare capacity.
“It’s a lot like Warren Buffett’s saying where, as the tide goes out, you find out who’s swimming naked,” Jeff Currie, chief strategy office of energy pathways at Carlyle, told Bloomberg Television last month.
“In this case, swimming naked is not having spare production capacity,” Currie said in the Bloomberg interview in early September, when OPEC+ announced it is beginning to reverse the 1.65-million-bpd cuts announced in April 2023.
The market is currently focused on the looming oversupply later this year and in early 2026. But the diminishing spare capacity, which is predominantly in two major producers in the Middle East, won’t be able to offset a major supply shock, leaving oil prices exposed to potential spikes when the next crisis comes.
By Tsvetana Paraskova for Oilprice.com
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