• 4 minutes Pompeo: Aramco Attacks Are An "Act Of War" By Iran
  • 7 minutes Who Really Benefits From The "Iran Attacked Saudi Arabia" Narrative?
  • 11 minutes Trump Will Win In 2020
  • 15 minutes Experts review Saudi damage photos. Say Said is need to do a lot of explaining.
  • 8 mins Ethanol, the Perfect Home Remedy for A Saudi Oil Fever
  • 6 hours Hong Kong protesters appeal to Trump for support.
  • 4 hours Millennials: A boil on the butt of the work ethic
  • 5 hours A little something for all you Offshore swabbies
  • 18 hours Iran Vows Major War Even If US Conducts "Limited Strikes"
  • 13 hours Ban Fracking? What in the World Are Democrats Thinking?
  • 16 hours Europe: The Cracks Are Beginning To Show
  • 30 mins When Trying To Be Objective About Ethanol, Don't Include Big Oil Lies To Balance The Argument
  • 4 hours Memorize date 05/15/2018 cause Huawei ban is the most important single event in world history after 9/11/2001.
  • 42 mins LA Times: Vote Trump out in 2020 to Prevent Climate Apocalypse
  • 3 hours Saudi State-of-Art Defense System looking the wrong way. MBS must fire Defense Minister. Oh, MBS is Defense Minister. Forget about it.
  • 6 hours US and China are already in a full economic war and this battle for global hegemony is a little bit frightening
  • 4 hours Shale profitability
  • 13 hours Let's shut down dissent like The Conversation in Australia
Alt Text

How New Technology Is Revolutionizing Oil & Gas

After years of lagging behind…

Alt Text

Oil Wealth Could Fund Free Education In This State

Money from New Mexico’s general…

Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

More Info

Premium Content

US Demands For More Oil Could Backfire

This week the State Department accused OPEC of hiding spare capacity exceeding 1.4 million barrels daily. It urged the cartel to use it to stop the oil price rally that has continued uncomfortably close to midterm elections. The request—or demand, depending on your interpretation—is unprecedented and it might do more harm than good.

Bloomberg quoted a veteran energy analyst from Jefferies, Jason Gammel, as saying, “This is the lowest level of spare capacity in the global system relative to demand that I’ve ever seen. Spare capacity is moving to a precariously low point.” The problem is, nobody seems to be certain exactly how much OPEC’s spare capacity is.

In its latest Short-Term Energy Outlook, the EIA estimated OPEC’s spare production capacity at 1.66 million bpd. But the International Energy Agency last month estimated OPEC’s spare capacity at 2.7 million bpd and is fast declining. What we do know, however, is how much spare capacity Saudi Arabia has: 1.3 million bpd, as revealed by the Energy Minister of the Kingdom during the Russian Energy Week in Moscow.

This is bad news. Until now, various sources, including the Saudis themselves and the EIA, put the Kingdom’s spare capacity at between 1.5 and 2 million bpd. In June, President Trump said the Saudis could pump 12 million bpd. The IEA concurred. Saudi Arabia’s September production rate rose to 10.7 million bpd.

From this level of production, with 1.3 million bpd in spare capacity, we get a maximum production rate of 12 million bpd, indeed. However, Khalid al-Falih delivered a worrying message: Saudi Arabia will spend US$20 billion on maintaining and boosting its spare capacity in the coming years. The news naturally cast doubt on whether the current capacity will be sufficient to cover demand.

So, Saudi Arabia has 1.3 million bpd and the rest of OPEC—except Iran, of course—would probably be able to scrounge another 100,000 bpd to fulfill Washington’s request. Prices should go down and Indian refiners should breathe a sigh of relief. Unfortunately, what should happen does not necessarily happen. Related: Goldman Warns Of Oil Market Surplus Next Year

The oil market is an extremely irrational one. The latest evidence of this came just this week when the Energy Information Administration reported a huge build in U.S. commercial oil inventories—8 million barrels—and prices, after a slight dip, continued higher. True, now they are trending lower but that’s because of profit-taking. Even Russia’s Novak, who previously argued that seasonal weakness in demand would prevent oil prices from climbing much higher, now says they might reach US$100 “in a very nervous and emotional market.”

Indeed, few are those heeding advice from industry observers who say there is enough supply and this supply is coming from Iran and it will continue to be available even after the U.S. sanctions are reintroduced in early November. Few seem to be paying actual attention to warnings that the higher oil goes, the more it will weigh on demand. The oil market lives in the moment and cares not about fundamentals. What it cares about is fear.

The State Department’s request for OPEC to pump at capacity has caused fear rather than relief: “Oil markets will read it that spare production is at an all time low,” is how an analyst from IHS Markit put it for Bloomberg. “Blame speculators if you want, but this is how oil markets work,” Roger Diwan said.

By Irina Slav for Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment
  • Mamdouh G Salameh on October 07 2018 said:
    Whatever spare oil production capacity OPEC may or may not have, it is up to it on how it uses it to maximize the return on its members’ finite assets and also on stabilizing the global oil market and prices.

    OPEC and particularly Saudi Arabia and Russia are unable to raise their production significantly beyond the 650,000 barrels a day (b/d) which Saudi Arabia and Russia combined have already added two months ago no matter how loud President Trump shrieks.

    The US demand for more oil is enhancing the bullish trends in the global oil market by raising question marks and doubts about OPEC’s and Saudi Arabia’s spare capacities. In so doing, it is also lending a helping hand to a global oil market underpinned by robust fundamentals.

    May I also draw the attention of Ms Slav to a simple fact. If prices did not react to the announcement by the EIA of a huge build in U.S. inventories of 7.9 mbd, it is because the global oil market no longer believes in such announcements. The global oil market is aware that for years the EIA has used announcements of increases in US shale oil production and rises in the build-up of US crude and gasoline inventories to manipulate oil prices and force them downwards

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • This Guy on October 07 2018 said:
    So basicly, you're trying reverse psychology now? you've been telling us the whole time during the Bull Rally that it's going down, its going down. Now just before it's about to go down, youre telling us it's going to go up... give me a break.

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play