Shrinking Spare Capacity Will Only Send Oil Prices Higher

Oil Prices Today: WTI Crude • 121.7 +0.17 / Brent Crude • 123.2 +0.08

The decision by OPEC+ to boost its production quotas did not have the desired effect on oil markets, with prices having increased since then

When OPEC+ agreed to boost its monthly production growth target from 432,000 bpd to 648,000 bpd last week, many politicians in Europe and the White House across the Atlantic must have breathed a sigh of relief. But it wasn’t a lengthy relief. Following the OPEC+ announcement, oil prices should have dropped, but they didn’t. Prices rose. And this wasn’t just because the increase in target production growth could remain on paper only. It was because of spare capacity as well.

That the world’s spare oil production capacity is quite tight has been known for a while now. There have been warnings that underinvestment in new oil exploration, in large part a result of the investor shift to ESG opportunities and government policies discouraging more investment in oil, will lead to lower spare capacity. Yet these warnings remained largely unheeded.

According to conservative estimates, cited by Reuters, OPEC’s spare production capacity could slip below 1 million barrels daily by the end of this year. This is equal to less than 1 percent of global demand.

One energy analyst put it succinctly after OPEC+ announced the new production target.

“Saudi has to make a choice — do we let the price go higher while maintaining a super emergency, super crisis level of spare capacity? Or do we add oil into the market and go to effectively almost zero spare capacity, and then what happens if Libya goes down?”

Paul Sankey from Sankey Research
According to forecasts

OPEC+ will go nowhere near its new target: JP Morgan sees actual output additions at 160,000 bpd in July and 170,000 bpd in August. … although geopolitical considerations have a big part to play in OPEC+’s policies, there is simply not enough spare production capacity to make that production boost work.