The OPEC+ group is gradually increasing oil supply, but cautiously, to avoid price declines as demand weakens post-summer. These increases are likely smaller than reported, as some producers are at their capacity limits, while others are making up for past overproduction.
While these modest increases support prices, they also diminish the spare production capacity within OPEC+. Saudi Arabia, the UAE, and Iraq are the primary exceptions, with most other members already operating at maximum output. This leaves the market vulnerable to the next supply shock – be it from Middle East instability or further sanctions on Russia or Iran.
Supply Cushion Thinning
over the past three years, OPEC+ cuts, reaching as high as 5% of global consumption, have bolstered oil prices and eased concerns during geopolitical events like the Israel-Iran tensions of 2023.
However, as OPEC+ reverses these cuts – currently releasing 1.65 million barrels per day (bpd) – the remaining spare capacity is dwindling, and the market’s ability to absorb future shocks is weakening.
In the current volatile geopolitical landscape,a supply shock could quickly expose the limitations of OPEC+’s ability to maintain a “stable” oil market. Insufficient spare capacity would be unable to offset a significant supply disruption. Analysts also caution that the market is likely overestimating the amount of available spare capacity.
Related: High Costs, Low Prices Threaten to Stall Argentina’s shale Ambitions
Standard Chartered research highlighted a discrepancy this summer between industry perceptions and market analyst estimates of spare production capacity. While analysts frequently enough cite 5-6 million bpd of spare capacity, industry speakers emphasized its limited and geographically concentrated nature.
StanChart believes this miscalculation has suppressed oil prices and could have significant implications for the oil price forward curve when traders recognize that approximately two-thirds of the assumed spare capacity is unavailable.
The International Energy Agency (IEA) defines spare capacity as levels achievable within 90 days and sustainable over time.
Spare Capacity May Be Overhyped
The IEA’s latest monthly report estimates that the total spare capacity available to the market is significantly lower than commonly believed.