What’s Next for Oil?
Next week OPEC (the Organization of the Petroleum Exporting Countries) is scheduled to announce whether it will agree on an increase in crude output, a move that could open the world up to greater price hikes due to supply disruption. The proposed move could squeeze spare production capacity which is the amount of extra production oil producers can bring onstream and sustain with short notice, which is meant to be used in the event of natural disaster, war, or unplanned supply disruptions. Spare capacity now hovers around 3 percent of global demand, but it could fall to 2 percent, the lowest point since 1984, if OPEC makes changes. In raw numbers, spare capacity could fall to 2 million barrels per day from 3.2 million bpd. Some analysts are predicting that this number could be even lower. Saudi Arabia currently holds the bulk of the world’s spare capacity.
Last month, Saudi Energy Minister Khalid al-Falih told Reuters that he is concerned about tight spare capacity even though the industry is in better shape now than it was in 2016 OPEC has been working hard to curb production and to reduce global inventories since last year, a move which has sent prices higher. Also sending prices higher are production cuts in Venezuela and Washington’s decision to reimpose sanctions on Iran after the U.S. withdrew from the Iranian nuclear deal. With rising prices and decreased spare capacity, any geopolitical event could shake the markets and send oil prices soaring.
U.S. WTI futures were up on Wednesday morning in London, gaining 15 cents per barrel to $66.25 per barrel. Brent crude futures were up 20 cents per barrel to $76.64 per barrel as of 11:33 a.m. GMT.