Tight spare capacity is likely to keep oil prices volatile and sensitive to any disruptions in output, such as a big hit from a hurricane to Gulf of Mexico production during the Atlantic storm season, or a further fall in exports from sanctions-hit Russia.
After more than a year of pressure from the United States and other top oil consuming countries, the Organization of Petroleum Exporting Countries(OPEC)+ finally agreed to accelerate oil supply increases last week to tame runaway fuel prices and slow inflation.
But that will leave producers with very little spare capacity, and almost no room to compensate for a major supply outage.
The most conservative estimates forecast OPEC’s spare capacity dropping to below 1 million barrels per day (bpd) later this year, representing about 1 per cent of global demand and barely one twentieth of U.S. demand.
Only a handful of OPEC producers, namely Saudi Arabia and the United Arab Emirates, have any meaningful spare capacity.
Consultancy Energy Aspects sees spare capacity within OPEC+ a group comprising OPEC and allies led by Russia at 1 per cent of global demand of 102 million bpd by year-end, its lowest level since at least 2012 when it began its assessments.
Spare capacity dipped to similar levels when key OPEC producers briefly pushed output above sustainable levels during the April 2020 price war, Energy Aspects’ head of geopolitics, Richard Bronze said.
Barclays says dwindling spare capacity will be a key driver for heightened volatility in the oil market.
The bank raised its oil price forecast for Brent by $11 a barrel for 2022 and $23 a barrel for 2023.
“Saudi Arabia will be producing (about) 11 million bpd by the end of summer, and real spare capacity globally which can be brought online fairly quickly will be standing at just 1.5 per cent of global demand,” the bank said.
The bank raised its oil price forecast for Brent by $11 a barrel for 2022 and $23 a barrel for 2023.
“Saudi Arabia will be producing (about) 11 million bpd by the end of summer, and real spare capacity globally which can be brought online fairly quickly will be standing at just 1.5 per cent of global demand,” the bank said.
Saudi Arabia says it can produce about 12 million bpd, but this level has never been tested. The kingdom has never previously pumped at the 11 million bpd mark for a sustained period.
On June 2, OPEC+ agreed to speed up steady monthly output increases as it slowly reversed the deep production cuts made at the height of the COVID-19 pandemic. OPEC+ has set itself a target to lift output by 648,000 bpd per month in July and August.
The group is unlikely to pump as much as it is targeting. Many members of the OPEC+ alliance have been grappling for years with capacity constraints due to underinvestment.
JPMorgan expects OPEC+ to add 160,000 bpd in July and 170,000 bpd in August.
Russia is also well below its target as sanctions following its invasion of Ukraine on Feb. 24 make exports difficult.
Russian oil output declined by about 1 million bpd from pre-invasion levels in April, according to the International Energy Agency (IEA), but some analysts forecast that decline to deepen to least 1.5 million bpd later this year due to sanctions.
Going forward, some analysts say that a challenge to oil’s bull run could come from consumers using less oil as high prices hit their finances.
“Bullishness for crude prices has hit some exhaustion as the energy market has mostly priced in the EU’s ban on most Russian oil imports, a modest boost by OPEC+, and elevated prices that will surely lead to some demand destruction over the coming months,” OANDA analyst, Edward Moya said.
