OPEC will squeeze oil buffer to historic lows with an output hike

FILE PHOTO: An oil tanker is being loaded at Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia May 21, 2018. REUTERS/Ahmed Jadalla

LONDON (Reuters) – The oil industry will face the biggest squeeze on its spare production capacity in more than three decades if OPEC and its allies agree next week to hike crude output, leaving the world more at risk of a price spike from any supply disruption. Spare capacity is the extra production oil producing states can bring onstream and sustain at short notice, providing global markets with a cushion in the event of natural disaster, conflict or any other cause of an unplanned supply outage. That buffer could shrink from more than 3 percent of global demand now to about 2 percent, its lowest since at least 1984, if the Organization of the Petroleum Exporting Countries, Russia and other producers decide to increase output when they meet on June 22-23, U.S. bank Jefferies said. “You would essentially be taking 3.2 million barrels per day (bpd) of spare capacity down to approximately 2 million bpd,” Jefferies analyst Jason Gammel said, adding global demand was 100 million bpd. Saudi Arabia, OPEC’s de facto leader which has indicated its support for hiking output at next week’s meeting in Vienna, has said it is alert to the potential squeeze on the market. “We are concerned about tight spare capacity nowadays,” Saudi Energy Minister Khalid al-Falih told Reuters last month, although he also said the industry was in “better shape” than in 2016 when oil prices plunged below $30 a barrel. OPEC and its allies have been curbing supply since January 2017 to boost oil prices and cut bloated global inventories. The price of crude has since surged, climbing above $80 a barrel last month, while inventories have also fallen. The precise level of spare capacity available depends in part on how it is defined. The Paris-based International Energy Agency (IEA), which bases its figures on oil production that can be brought onstream within 90 days and sustained for an extended period, estimates OPEC’s spare production capacity was 3.47 million bpd in April, with Saudi Arabia accounting for roughly 60 percent. Based on the EIA definition, Robert McNally at consultancy Rapidan Energy Group said Saudi Arabia, Russia, Kuwait and United Arab Emirates together had spare capacity of about 2.3 million bpd. But Saudi Arabia could even boost production beyond its stated output capacity of about 12.5 million bpd, possibly adding another 1 million bpd of what is known as surge capacity.