Is IEA Overhyping OPEC's Spare Capacity?

Is IEA Overhyping OPEC's Spare Capacity? | OilPrice.com

OPEC's spare oil production capacity is the go-to argument by many analysts when the threat of higher prices rears its head. The latest International Energy Agency monthly report was no exception. But the IEA, like all those analysts, may be overplaying the spare capacity hand.

Because to make it work, OPEC has to want to use it.

The IEA said in its October Oil Market Report out Tuesday that the global oil market is now quite comfortably supplied thanks to declining Chinese demand growth. This was a development only to be expected after a massive post-lockdown demand rebound over the last two years, in the second of which China stocked up on discount Russian crude just in case.

Yet the last few updates on Chinese demand developments have had an outsized impact on oil prices, in large part thanks to the automation of oil trading. This impact, in turn, will affect investment in new production—and future supply.

According to the IEA—and numerous analysts—non-OPEC supply is enough to make up for the cuts that the cartel is still making to production in what increasingly looks like a doomed attempt to pull prices higher and boost OPEC state budgets. The United States' production is growing, Brazil's production is growing, and Guyana's production is growing—as is Canada's. Together, the IEA tells us, this is enough to cover projected crude oil demand growth both this year and in 2025.

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Indeed, Guyana's oil production is on a robust rise. The tiny South American country is currently producing over 660,000 bpd of crude, which is up from about 400,000 bpd at the end of last year. Plans are to boost that to over 1 million bpd by 2030. So far, so good.

U.S. production is also on the rise—but this is not the meteoric rise of last year as drillers are even more cautious in a context of chronic heightened price uncertainty thanks to algo trading and skittish traders whenever they hear "Chinese demand." According to the latest data from the Energy Information Administration, between January and July this year, production has gained some 651,000 barrels daily—and the July figure, at 13.205 million bpd, was lower than the June figure, at 13.23 million bpd, suggesting U.S. oil production growth is not a straight line pointing upwards.

Canada's oil production is also gaining. Since the start of this year, the average daily production rate has been 5.8 million barrels. That's up from 4.9 million barrels last year, which is indeed quite substantial growth of close to a million barrels daily. It's also worth noting that production growth is taking place despite increasingly draconian government regulations on its own energy industry, which some fear will stifle future growth.

Brazil is a different case from the above. While the government and state energy major Petrobras are firm in their commitment to production growth, actual growth has been hard to come by and uneven. The data for August, for instance, shows that Brazil produced 3.34 million barrels per day. This was higher than the July total by 3.4%, but lower than the August 2023 total by 3.5%.

So, the main non-OPEC group has boosted its collective production by some 1.5 million barrels daily this year, which should comfortably cover demand growth. But next year, demand is expected to grow more substantially, even according to the International Energy Agency, and there is zero guarantee that the four big non-OPEC producers would respond to that with a respective increase in production—especially if prices remain unresponsive to anything but Chinese oil demand updates.

Meanwhile, the price jump earlier this month following Iran's missile attack on Israel proved that Chinese economic data holds powerful sway, but all it takes is the threat of losing Middle Eastern supply to see the benchmarks change direction—even in an otherwise well-supplied market with growing non-OPEC production. Again, the OPEC spare capacity card was played. Again, no one mentioned the most obvious thing about it. Just because OPEC has spare capacity—distributed among just a few of its members—it does not mean it would use it at the drop of a hat.

For years now, OPEC and its OPEC+ partners have been sacrificing market share in order to prop up prices. They have not had much of a success. In this context, what exactly are the chances that, in case of a supply disruption, Saudi Arabia and the UAE would jump at the opportunity to tap their spare capacity and keep the world well-supplied and prices depressed? They don't look too good, for sure, especially as Saudi Arabia tries to keep its ambitious diversification program going and the UAE pushes ahead with its own diversification.

There is, however, good supply news over the longer term. Wood Mackenzie recently reported that spending on more oil and gas production is set for an increase next year as the industry realizes that the energy transition is not going as fast as probably feared earlier.

By Irina Slav for Oilprice.com

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