Market News Global spare capacity shrinks, and upward pressure on oil prices is increasing!
Global spare capacity shrinks, and upward pressure on oil prices is increasing!
The decision by OPEC+ to increase production quotas did not have the expected impact on the oil market, which has been rising ever since. One of the main reasons for this upward pressure is the extremely tight global spare oil capacity. With so little spare capacity, the risk of a production shutdown in Libya or hurricane damage in the Gulf of Mexico worries oil markets.
2022-06-10
9562
European politicians and the White House across the Atlantic breathed a sigh of relief last week when OPEC+ agreed to raise its monthly output growth target to 648,000 bpd from 432,000 bpd. But it's not a long-term relief. Oil prices should have fallen after the OPEC+ announcement, but instead, prices rose . This is not just because the increase in target production growth is likely to stay on paper, but also because of spare capacity .
Global spare oil capacity is quite tight , and this has been known for some time. There have been warnings that underinvestment in new oil exploration, largely due to investors' shift to ESG (environmental, social and corporate governance) and government policies discouraging more investment in oil, will lead to a drop in spare capacity. However, these warnings have largely gone unheeded.
In OPEC+, only a few countries have been able to increase oil production in a noticeable way, and their combined spare capacity is not that large and is declining .
By conservative estimates, OPEC’s spare capacity could fall below 1 million barrels per day by the end of the year, which is less than 1% of global demand. With OPEC's current spare capacity of around 3 million bpd, according to the U.S. Energy Information Administration (EIA), the situation looks much better. Expanded OPEC+ spare capacity is about 1% of global daily demand, currently around 102 million barrels, according to Energy Aspects.
According to the U.S. EIA's definition of spare capacity, that's not all the oil that can be pumped in 30 days. If there is an outage somewhere in the world, it will be painfully obvious how trivial it is. One energy analyst pointed it out succinctly after OPEC announced its new output target.
Paul Sankey of Sankey Research said last week: “The Saudis have to make a choice – do we let oil prices continue to rise while maintaining super-emergency, super-crisis levels of spare capacity? Or do we add oil to the market and leave spare capacity practically zero, And then what happens if the situation in Libya deteriorates?"
The situation becomes even more dire given that Libya "worst" on average quarterly , sometimes for extended periods of time, and considering that the hurricane season in the Gulf of Mexico has already begun .
In previous years, the hurricane season disrupted much of the U.S. offshore oil production, which accounts for 15% of total U.S. oil production. The bullish factors for oil only seem to be increasing.
According to reports, Barclays said in a report: "By the end of this summer, Saudi Arabia's production will reach about 11 million barrels per day, while the world's actual spare capacity accounts for only 1.5% of global demand ." Barclays will release this year . Expected prices for Lent crude were raised by $11 a barrel and $23 a barrel next year .
Foreign media pointed out in the report that if this happens, Saudi Arabia will be close to the limit of its spare capacity, it has never produced 11 million barrels per day for a long time, and it may not do so now.
In fact, according to other forecasts, OPEC+ will fall far short of its new target. JPMorgan expects actual production to rise by 160,000 bpd and 170,000 bpd in July and August, respectively. Geopolitics aside, while geopolitical factors play an important role in OPEC+'s policy, there simply isn't enough spare capacity to increase production.
Brent Crude Oil Daily Chart
GMT+8 at 10:30 on June 10, Brent crude oil continuously reported $122.09/barrel
Global spare oil capacity is quite tight , and this has been known for some time. There have been warnings that underinvestment in new oil exploration, largely due to investors' shift to ESG (environmental, social and corporate governance) and government policies discouraging more investment in oil, will lead to a drop in spare capacity. However, these warnings have largely gone unheeded.
In OPEC+, only a few countries have been able to increase oil production in a noticeable way, and their combined spare capacity is not that large and is declining .
By conservative estimates, OPEC’s spare capacity could fall below 1 million barrels per day by the end of the year, which is less than 1% of global demand. With OPEC's current spare capacity of around 3 million bpd, according to the U.S. Energy Information Administration (EIA), the situation looks much better. Expanded OPEC+ spare capacity is about 1% of global daily demand, currently around 102 million barrels, according to Energy Aspects.
According to the U.S. EIA's definition of spare capacity, that's not all the oil that can be pumped in 30 days. If there is an outage somewhere in the world, it will be painfully obvious how trivial it is. One energy analyst pointed it out succinctly after OPEC announced its new output target.
Paul Sankey of Sankey Research said last week: “The Saudis have to make a choice – do we let oil prices continue to rise while maintaining super-emergency, super-crisis levels of spare capacity? Or do we add oil to the market and leave spare capacity practically zero, And then what happens if the situation in Libya deteriorates?"
The situation becomes even more dire given that Libya "worst" on average quarterly , sometimes for extended periods of time, and considering that the hurricane season in the Gulf of Mexico has already begun .
In previous years, the hurricane season disrupted much of the U.S. offshore oil production, which accounts for 15% of total U.S. oil production. The bullish factors for oil only seem to be increasing.
According to reports, Barclays said in a report: "By the end of this summer, Saudi Arabia's production will reach about 11 million barrels per day, while the world's actual spare capacity accounts for only 1.5% of global demand ." Barclays will release this year . Expected prices for Lent crude were raised by $11 a barrel and $23 a barrel next year .
Foreign media pointed out in the report that if this happens, Saudi Arabia will be close to the limit of its spare capacity, it has never produced 11 million barrels per day for a long time, and it may not do so now.
In fact, according to other forecasts, OPEC+ will fall far short of its new target. JPMorgan expects actual production to rise by 160,000 bpd and 170,000 bpd in July and August, respectively. Geopolitics aside, while geopolitical factors play an important role in OPEC+'s policy, there simply isn't enough spare capacity to increase production.
Brent Crude Oil Daily Chart
GMT+8 at 10:30 on June 10, Brent crude oil continuously reported $122.09/barrel
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