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The biggest threat for OPEC

UNITED STATES (OBSERVATORY) –┬áReserve capacity of OPEC – the additional volume of production that it can reach within 30 days and maintain a minimum of 90 days – today it is not the same as before, and this increases the risk of a sharp jump in oil prices.

A persistent feature of the oil market is the prospect of unforeseen disruptions in deliveries, whether as a result of war, industrial accidents, sabotage, natural disasters or more simple causes. These interruptions range from minor inconvenience to a large-scale crisis, depending on the size, volume and duration of the shutdown.

OPEC, as a rule, intervenes in such situations with the help of additional supplies, which compensates for the lost volumes. IEA member countries also have strategic oil reserves that help to alleviate possible disruptions, although the US is currently selling off its reserves.

In reality, Saudi Arabia is one of the main sources of global reserve capacity. The Kingdom in a relatively short time is able to increase or decrease the extraction of “black gold”.

A low level of reserve capacity usually occurs when oil prices are high. From 2003 to 2008 OPEC reserve capacity was at or below 2 million barrels a day, at that time there was also a sharp increase in demand.

The financial crisis and the collapse of oil prices forced OPEC to increase its reserve capacity to more than 4 million barrels a day.

The oil collapse of 2014-2016. was unique, as OPEC did not reduce supply and continued to increase production (while reducing reserve capacity) in conditions of excessive supply. Not surprisingly, at that time oil prices plummeted.

The decision by OPEC and Russia to reduce oil supplies in early 2017 restored reserve capacity to 2 million barrels per day. But a year and a half after the introduction of the reduction, the growth in demand absorbed part of the excess supply. The surplus of stocks has almost disappeared, and based on current trends, the supply deficit is likely to continue. The market again lacks oil, and the reserve capacity does not exceed 2 million barrels a day, which from the historical point of view is very small.

The fact is that the size of OPEC’s reserve capacity has not changed for a long time, although the size of the market has increased over this period. In 2006, the demand for oil was about 85 million barrels per day, and the reserve capacity was 2 million barrels per day. Today, reserve capacity is still about 2 million, and the oil market is already 15 million more than in 2006.

This means that OPEC’s reserve capacity decreased as a percentage of the global supply. And in the short term it is difficult to expect that these capacities will increase.

When OPEC begins to curtail its production constraints and increase production (as expected next year), reserve capacity will again fall. According to the forecast of the US Energy Information Administration by the third quarter of 2019, reserve capacity will decrease to 1.24 million barrels per day.

Insufficient reserve capacity means that even minor disruptions in deliveries can have a serious impact on oil prices, and a large-scale stop – to a sharp price jump. The real threat to the market is the fall in production in Venezuela, as well as possible interruptions in Iran, Libya and Nigeria.

Last week, Saudi Arabian oil minister Khalid al-Falih warned of the threat of low reserve capacity. According to him, other countries should help in this matter, since Saudi Arabia is no longer able to “carry this load alone.”

And what about the American shale, which is often called “additional reserve capacity” because of the ability of shale drillers to rapidly increase production? This sector is certainly more flexible and mobile than traditional oil producers, but it is not entirely correct to call shales “additional reserve capacity”. Shale drillers make individual decisions based on their own financial interests, rather than on the broad market needs.

In addition, slate drillers can not and will never act in unison. That is why the American slate sector has never created reserve capacity and can not compensate for any interruptions in supplies in other countries of the world.

Nevertheless, it is quite real that the American slate will grow so quickly that it will completely cover the possible deficit in the market and thereby restrain prices, despite the low level of reserve capacity. However, if the production of slate in the United States is reduced and traditional producers can not increase the supply, the market will be in an extremely difficult situation.