OPEC+ Nears Its Limit, Leaving Prices One Crisis Away from a Spike

The OPEC+ group continues to return modest volumes of supply to the market, cautious not to sink oil prices as demand weakens after the summer. The production hikes are estimated to be lower than the headline figures suggest—some producers lack the capacity to boost output further, while others are compensating for previous overproduction.

While the lower-than-planned production increases support oil prices, they also reduce the spare capacity of the OPEC+ producers. Not that many of them have any meaningful spare production capacity. Except for Saudi Arabia, the United Arab Emirates (UAE), and Iraq, the other members of the OPEC+ alliance are likely maxed out, leaving the market in a precarious position when the next supply shock occurs. This could emerge with another flare-up in the Middle East or more sanctions on Russia or Iran.

Supply Cushion Thinning

Over the past three years, the OPEC+ cuts, which at one point withheld supply equivalent to about 5% of global consumption, have supported oil prices. But the spare capacity that the cuts left have also eased fears of shortages during all the Israel-Iran flare-ups since 2023, for example.

However, as OPEC+ proceeds with reversing these cuts, now tapping its last layer of reductions of 1.65 million barrels per day (bpd), the spare capacity in those producers that do have it is shrinking. So is the ability of the market to absorb the next supply shock.

In today’s fragmented and volatile geopolitical situation, this shock could occur any day and expose the limitations of the OPEC+ alliance in managing a “stable” oil market, as it likes to say.

Insufficient spare capacity will not be able to offset a major shock to supply. Analysts have also warned that the market is overestimating the size of said spare capacity.

Standard Chartered Research said this summer that a recent OPEC international seminar showed a mismatch between what energy producers vs. market analysts think about spare production capacity. Unlike Wall Street analysts, who frequently talk about spare capacity of 5-6 million bpd, speakers from several sectors of the industry noted that spare capacity is both limited and very geographically concentrated.

StanChart believes this erroneous assumption about spare capacity has been a big drag on oil prices, and the implications for the whole forward curve of oil prices could be potentially profound once traders realize that roughly two-thirds of the capacity they thought was available on demand does not actually exist.

Spare capacity, as defined by the International Energy Agency (IEA) is “capacity levels that can be reached within 90 days and sustained for an extended period.”

Spare Capacity May Be Overhyped

The IEA, in its latest monthly report, estimates that the total OPEC+ spare capacity is 4.05 million bpd, including 2.43 million bpd in Saudi Arabia, 850,000 bpd in the UAE, and 320,000 bpd in Iraq. All other OPEC+ producers are maxed out.

But after several years of reduced production levels, it’s not certain how much even Saudi Arabia could bring within three months should a supply shock hit the market.

In November, Saudi Arabia’s production quota will be 10.06 million bpd.

Saudi Arabia says its total sustainable production capacity is 12 million bpd. However, it pumped 12 million bpd only once in its history, for one month in early 2020 during the price war with Russia, before COVID sank consumption and forced major output cuts from the OPEC+ group. The Saudis have pumped 11 million bpd or more only for short-lived periods of time in 2018 and in 2023.

Based on precedents, Saudi Arabia’s current spare production capacity is likely only between 600,000 bpd and 1 million bpd that can be brought up quickly and sustained for a period of time, according to estimates by Reuters’ energy columnist Ron Bousso.

Right now, apart from Saudi Arabia and the UAE, the other OPEC+ producers do not have spare production capacity, which limits the upside to their production in the coming months, despite the fact that the group has extended the reversal of the cuts into October and November.

OPEC+ delegates told Bloomberg last month that they expect about half of the headline output hikes to be delivered going forward, due to compensations for overproduction and a lack of spare capacity.

“It’s a lot like Warren Buffett’s saying where, as the tide goes out, you find out who’s swimming naked,” Jeff Currie, chief strategy office of energy pathways at Carlyle, told Bloomberg Television last month.

“In this case, swimming naked is not having spare production capacity,” Currie said in the Bloomberg interview in early September, when OPEC+ announced it is beginning to reverse the 1.65-million-bpd cuts announced in April 2023.

The market is currently focused on the looming oversupply later this year and in early 2026. But the diminishing spare capacity, which is predominantly in two major producers in the Middle East, won’t be able to offset a major supply shock, leaving oil prices exposed to potential spikes when the next crisis comes.

By Tsvetana Paraskova for Oilprice.com

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