Analysts: Oil production capacity will fall to historic levels if OPEC increases its supplies

The oil sector will face the biggest pressure on surplus capacity in more than 30 years if OPEC and its allies agree next week to increase crude output, making the world more vulnerable to rising prices as a result of any supply disruption.
Excess capacity is excess production that oil states can start pumping in a short period of time and maintain it for a while, providing protection to global markets, avoiding the consequences of natural disaster, conflict, or other factors causing unexpected production disruptions.
Excess capacity could fall from more than 3 percent of global demand to around 2 percent, its lowest level since at least 1984, if OPEC, Russia and other producers decide, according to Jason Gamel, an analyst at US investment bank Geoffries. Increase production at the meeting on 22 and 23 June.
“The surplus capacity of 3.2 million barrels per day will inevitably be reduced to around 2 million barrels per day,” he said, adding that global demand was 100 million bpd.
Some analysts say surplus production capacity could fall to less than 2 percent after low prices over the years have reduced investment in new sector production.
Saudi Arabia, OPEC’s biggest producer, which has indicated its support for increased production at a meeting next week in Vienna, said it was aware of the potential pressure on the market. Saudi Energy Minister Khalid al-Faleh said last month the kingdom was concerned about the lack of spare capacity at the moment, but added that the sector was better off than in 2016 when oil fell below $ 30 a barrel.
WBC and its allies have been cutting supplies since January 2017 to boost oil prices and cut global stockpiles. The price has since risen above $ 80 a barrel last month, while stocks have fallen.
However, the decline in stocks, which has now reached an average of five years in industrialized countries, makes the OPEC dilemma more difficult.
“We no longer have reserves or excess production capacity,” Claudio Discalzi, chief executive of Italy’s ENI, said in January. “In this context, geopolitical events can lead to price rises.” The US decision to pull out of the nuclear deal with Iran and re-impose sanctions on Tehran has helped push prices to their highest level since 2014.
“With the high level of stocks over the last few years, there was no need for a market reaction to growing political risk because the stock was actually similar to excess capacity,” says Gamel. Iran’s OPEC delegate, Hossein Kazimpour Ardebili, said last week that oil prices could jump to $ 140 a barrel. US sanctions on oil exports, OPEC’s third biggest producer after Saudi Arabia and Iraq, hurt US exports.
Brent crude is currently trading above $ 76 a barrel.
Oil prices will be supported “in the case of a balance between supply and demand, a significant decline in inventories, and not excess capacity,” said Martin Ratz, global oil market analyst at Morgan Stanley.
Determining the level of excess capacity depends in part on how it is defined. The Paris-based International Energy Agency (IEA), based on oil production that can be pumped within 90 days and maintained for an extended period, estimates OPEC’s surplus production capacity of 3.47 million bpd in April is about 60 In Saudi Arabia.
The US Energy Information Administration defines excess capacity as production that can be pumped within 30 days and maintained for at least 90 days. OPEC’s surplus capacity is estimated at 1.91 million bpd in the first quarter.
Robert McNally of the Rapidan Energy Advisory Group said total capacity in Saudi Arabia, Russia, Kuwait and the United Arab Emirates was about 2.3 million bpd, according to the US Energy Information Administration.
“So if they raise production to about one million barrels per day, there will be 1.3 million barrels per day, which reduces the minimum range to historic levels that are uncomfortable in light of the high and growing risks of geopolitical turmoil.”
But OPEC, Russia and others said any increase in production would be gradual. OPEC’s Gulf members are likely to raise production by less than 1 million barrels per day immediately, and the increase will rise to about 1.5 million bpd within three to six months, said Sam Alderson, an analyst at energy consultancy consultancy Energy Impact.
Saudi Arabia, which has the most spare capacity in the world, said it needed 90 days to move drilling rigs to new wells and increase production to 12 or 12.5 million bpd. The kingdom’s production in May was about 10 million barrels per day.
But Saudi Arabia could increase production to more than the declared capacity of about 12.5 million barrels per day, and may add another million barrels per day in what is known as reserve capacity for emergency needs. The kingdom did so during the wars in the Gulf and Iraq, but the increase in production lasted only a few months.

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