OPEC‘s spare oil production capacity is often cited by analysts as a key factor when the specter of rising oil prices looms. The recent International Energy Agency (IEA) monthly report supports this view, but it raises the question: how effective is this spare capacity if OPEC is reluctant to utilize it?
In its October Oil Market Report, released on Tuesday, the IEA indicated that the global oil market is currently well-supplied, largely due to a decline in demand growth from China. This shift was anticipated following a significant rebound in demand after lockdowns over the past two years. Notably, China had stocked up on discounted Russian crude to safeguard its supply.
The fluctuations in Chinese demand have significantly impacted oil prices, primarily driven by the increasing automation in oil trading. This volatility has further repercussions, potentially affecting investment in new oil production and future supply chains.
The IEA and various analysts contend that non-OPEC oil supply is sufficient to offset the production cuts imposed by the cartel, which seem aimed at driving prices higher to support OPEC member state budgets. Production in the United States, Brazil, Guyana, and Canada is on the rise. Collectively, these regions are projected to meet the anticipated crude oil demand growth for this year and into 2025.
Guyana’s oil production has surged impressively, currently exceeding 660,000 barrels per day (bpd), a substantial increase from around 400,000 bpd at the end of last year. The country aims to ramp up production to over 1 million bpd by 2030.
While U.S. production is also increasing, the growth rate has tempered compared to last year, as drillers navigate persistent price uncertainties exacerbated by algorithmic trading and sensitivity to Chinese demand reports. According to the latest data from the Energy Information Administration, U.S. production increased by 651,000 bpd between January and July this year. However, July’s output of 13.205 million bpd was slightly lower than June’s figure of 13.23 million bpd, indicating that growth may not follow a consistent upward trajectory.
Canada has experienced significant growth in oil production as well, averaging 5.8 million bpd since the beginning of the year, up from 4.9 million bpd last year. This increase of nearly 1 million bpd occurs amidst increasing governmental regulations, which some analysts fear could hinder future production growth.
Brazil presents a contrasting scenario. Despite commitments from both the government and state-owned energy company Petrobras to boost production, growth has been uneven. Data from August indicated production of 3.34 million bpd, reflecting a 3.4% increase from July but a 3.5% decrease compared to August 2023.
Collectively, the major non-OPEC producers have increased their output by approximately 1.5 million bpd this year, which should adequately cover demand growth. However, the IEA forecasts a more pronounced increase in demand for next year, with no assurance that these key non-OPEC producers will respond with higher production—especially if prices remain stagnant despite fluctuations in Chinese demand.
The recent price surge following Iran’s missile attack on Israel illustrates the significant influence of Chinese economic data on oil prices. This situation also underscores that even in a well-supplied market, threats to Middle Eastern supply can cause price benchmarks to shift dramatically. Again, the narrative surrounding OPEC’s spare capacity was highlighted, yet the critical caveat remained unaddressed: just because OPEC possesses spare capacity—concentrated among a few member states—does not guarantee its swift deployment.
For years, OPEC and its partners have prioritized price stabilization over market share, with limited success. In light of this, the likelihood that Saudi Arabia and the UAE would readily tap into their spare capacity during a supply disruption appears slim, particularly as both countries pursue ambitious diversification initiatives.
On a more optimistic note, Wood Mackenzie recently reported an anticipated increase in spending on oil and gas production next year. This trend reflects an industry realization that the energy transition may not be progressing as swiftly as previously anticipated.
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