OPEC+ is experiencing increased oil output, which is impacting market stability and diminishing its spare production capacity. This situation raises concerns for energy traders about potential volatility and supply disruptions.
Impact of OPEC+ Oil Output on Market Stability
The belief that OPEC+ could quickly address supply shortages has been a foundation of oil market confidence in recent years. Following production cuts in 2022, where they reduced output by 5.85 million barrels per day (bpd), OPEC+ increased global spare capacity, defined by the International Energy Agency (IEA) as the ability to provide additional supply within 90 days.
Decreasing Spare Capacity
However, since core members of OPEC+ began to unwind production cuts in April 2023, this buffer has been eroded. A new agreement reached on a recent Sunday aims to boost production by 137,000 bpd in November, bringing total increases since April to over 2.7 million bpd.
- The total spare capacity was estimated at 4.1 million bpd as of August, primarily held by Saudi Arabia (60%) and the UAE (20%).
- There are indications that the actual available capacity may be lower than estimated.
Challenges in Sustaining Production
Between April and August, OPEC+ members met only 75% of their targeted production increases, highlighting challenges in ramping up supply sustainably. Some nations, such as Iraq, have intentionally reduced output to correct past overproduction.
Saudi Arabia’s Production Capacity
Saudi Arabia, the world’s leading crude exporter, produced 9.69 million bpd in August. With its estimated spare capacity, the kingdom could potentially increase output above 12 million bpd. However, historical data indicates that Saudi Arabia has only exceeded 12 million bpd briefly during one month in April 2020.
- Saudi Arabia plans to raise its production to 10.06 million bpd in November.
- Historically, Saudi output has peaked at 11 million bpd only twice (2018 and 2023).
Conclusion: OPEC+ and Global Energy Markets
While OPEC+ continues to boost its production, the collective spare capacity is dwindling, leaving approximately 2 million bpd as a cushion in the face of global demand. This situation underscores the complexity of managing production levels amid geopolitical tensions and the potential for future price fluctuations.
As OPEC+ navigates these challenges, the energy market remains in need of stability mechanisms to cushion against external shocks. The gradual reduction of its spare capacity could present significant implications for future oil prices and market dynamics.
