OPEC’s ability to ease oil supply shock is fading, says report

The Organisation of Petroleum Exporting Countries’ (OPEC’s) ability to ease the pain of an oil-supply shock is appeared to be slipping.For half a century, the cartel has buffered global crude markets, curtailing production to ease oil gluts and boosting output to prevent shortages.

The International Energy Agency (EIA) in a report said OPEC’s spare capacity will by the third quarter of this year, fall to 1.25 million barrels a day, a level not seen since 2008, when oil prices peaked at $147 a barrel on tight supply and surging Chinese demand.

Now, as it heads into a June 2 meeting to discuss how to stabilize world oil markets, the cartel has neither the political consensus to cut output nor the technical capability to significantly raise production.

Since last year, OPEC members haven’t been able to agree on supply cuts to stem a glut that drove prices down by more than 50% since 2014. Instead they kept pumping full blast. The result: With recent supply outages sending the oil price back up, the cartel has little flexibility to boost production.

This year, OPEC’s spare pumping capacity—the amount it can bring online within 30 days and sustain for at least 90—will be at its lowest level since 2008, the U.S. Energy Information Administration estimates. It said OPEC spare capacity will decline more than 22% in the current quarter compared with the previous quarter.

OPEC hasn’t been forced to tap its spare capacity to handle recent outages because oil was stored at record levels when prices were low, creating a cushion against supply shocks. As those stocks are drained and non-OPEC production falls, OPEC could struggle to meet demand.

The cartel’s ability to boost output rests mainly with its biggest producer, Saudi Arabia, which has historically held nearly all of the group’s spare capacity. Since oil prices began falling in 2014, the Saudi state oil company has cut investments in new production. New production it brought onstream has mostly offset natural declines in other fields, rather than adding much new capacity.

Saudi officials have long said they can boost production by about 2 million barrels a day over today’s record daily production of 10.2 million barrels. But that 2 million barrels might not be possible in short order, a Saudi oil industry official said.
“If there was a big crisis tomorrow, then the maximum Saudi Arabia can do would be around 500,000, maybe 700,000 maximum,” the official said.