Analysts frequently cite OPEC‘s spare oil production capacity as a key factor in discussions about potential price increases. The latest report from the International Energy Agency (IEA) follows this trend, but it raises questions about whether the IEA is overstating the significance of this spare capacity.
For OPEC’s spare capacity to have any impact, the organization must be willing to use it.
In its October Oil Market Report released on Tuesday, the IEA noted that the global oil market is currently well-supplied. This stability is largely due to a slowdown in Chinese demand growth, which was expected after a significant rebound in demand following the COVID-19 lockdowns. In the second year following these lockdowns, China stockpiled discounted Russian crude to prepare for future needs.
However, recent fluctuations in Chinese demand have had a notable impact on oil prices, mainly due to the rise of automated oil trading. These price changes could also influence investment in new oil production and future supply.
According to the IEA and various analysts, non-OPEC production is sufficient to offset the cuts OPEC is making to its output. This reduction seems to be an unsuccessful attempt to drive prices higher and support the budgets of OPEC member states. U.S. production is on the rise, along with growth in Brazil, Guyana, and Canada. The IEA suggests that this collective increase will adequately meet projected crude oil demand growth for this year and in 2025.
Guyana, in particular, is seeing a significant surge in oil production. The small South American nation is currently producing over 660,000 barrels per day (bpd), an increase from about 400,000 bpd at the end of last year. Plans are in place to boost this output to over 1 million bpd by 2030.
U.S. production is also increasing, though not as dramatically as in previous years. Drill operators are adopting a more cautious approach amid ongoing uncertainty about prices, especially concerning news about Chinese demand. According to the Energy Information Administration, U.S. production rose by 651,000 bpd between January and July this year. However, the July output of 13.205 million bpd was slightly lower than June’s figure of 13.23 million bpd, indicating that growth in U.S. oil production is not consistent.
Canada’s oil production has increased as well. Since the beginning of this year, average daily production has reached 5.8 million bpd, up from 4.9 million bpd last year. This substantial growth of nearly 1 million bpd occurs despite increasingly stringent government regulations on the energy sector, which some fear may hinder future development.
Brazil’s situation differs from that of its peers. Although the Brazilian government and its state-owned energy company, Petrobras, are committed to increasing production, actual growth has been inconsistent. Data from August indicates that Brazil produced 3.34 million bpd, a 3.4% increase from July but a 3.5% decline from August 2023.
Collectively, the major non-OPEC producers have boosted their output by around 1.5 million bpd this year, which should comfortably accommodate demand growth. However, next year is expected to see a more significant increase in demand, and the IEA warns that there is no certainty that these four leading non-OPEC producers will raise their output in response, especially if oil prices remain stable despite fluctuations in Chinese demand.
Earlier this month, a price spike following Iran’s missile attack on Israel highlighted the influence of Chinese economic data on oil markets. This situation illustrates how sensitive oil prices are to geopolitical events, even in a market that appears well-supplied with growing non-OPEC production. Again, analysts referenced OPEC’s spare capacity, but it’s important to remember that just because OPEC has this spare capacity—primarily among a few member countries—it doesn’t guarantee they will use it immediately.
For years, OPEC and its OPEC+ partners have chosen to reduce market share to support prices, a strategy that has had limited success. In light of this, the likelihood that Saudi Arabia and the UAE would quickly utilize their spare capacity during a supply disruption seems low. Both countries are focused on ambitious diversification plans, which may limit their willingness to increase oil production.
Looking ahead, there is positive news for oil supply in the long term. Wood Mackenzie recently reported an anticipated increase in spending on oil and gas production next year. This change reflects the industry’s recognition that the energy transition may not progress as rapidly as previously expected.
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