Oil Market Vulnerability: Limited Spare Capacity Could Trigger Price Surges
Recent analysis suggests the oil market might potentially be more vulnerable to price shocks than currently perceived, due to a perhaps significant overestimation of available spare production capacity. The situation echoes a warning from Carlyle Group’s Jeff Currie, who likened the current market to a “tide going out” – revealing which producers are truly able to meet demand.
While OPEC+ has increased production this year, driven by Saudi Arabia‘s market share ambitions and pressure from the U.S., concerns are growing that the group is nearing its production limits. A recent OPEC symposium highlighted a divide between Wall Street’s estimates of 5-6 million barrels per day of spare capacity and industry experts who believe the actual figure is much lower and geographically concentrated.
Standard Chartered Research warns that this miscalculation is currently suppressing prices, but a realization that roughly two-thirds of assumed spare capacity doesn’t exist could dramatically impact the oil price forward curve.
currently, the International Energy Agency estimates OPEC+ spare capacity at 4.05 million barrels per day, largely held by Saudi Arabia (2.43 million), the UAE (850,000), and Iraq (320,000). However, even saudi Arabia’s ability to rapidly increase production is questioned, with some estimates placing thier lasting capacity closer to 600,000-1 million barrels per day, far below their claimed 12 million barrel limit (briefly reached during the 2020 price war).
Production from non-OPEC+ nations is also nearing past highs, with limited potential for significant increases in the near future.
This limited capacity raises concerns about the global crude market’s ability to absorb supply disruptions stemming from geopolitical events, such as escalating tensions in the Middle East or further sanctions against russia or Iran. Analysts believe that if concerns about insufficient spare capacity prove accurate, a clear supply gap could trigger a substantial surge in oil prices when the next geopolitical shock occurs.
