OPEC and allies snubbed calls from U.S. President Donald Trump to lower oil prices, saying on Sunday that they are satisfied with the “overall healthy balance between supply and demand.”
The key ministers of the OPEC+ deal participants, however, assured reporters and the market that their respective oil-producing countries have spare oil production capacity to meet demand by customers, if need be.
The key message from the energy ministers of Saudi Arabia, Russia, and the United Arab Emirates (UAE) was that if demand calls for higher production, they would be ready to respond. But right now, the oil market is fairly balanced, and OPEC and friends won’t rush to supply more oil than its customers want and need, as they are careful not to tip the market into oversupply that would chip away at their oil revenues once again.
Although OPEC+ didn’t decide to immediately boost oil production in this balanced market, as they view it, questions remain as to how much spare capacity that Saudi Arabia, the UAE, and Russia can bring online in case the market significantly tightens in November when U.S. sanctions on Iran snap back and Venezuela’s production drops to new lows.
The UAE is planning to boost its total oil production capacity to 3.5 million bpd by the end of this year, the emirates’ Energy Minister Suhail Al-Mazrouei told S&P Global Platts in an interview after the OPEC/non-OPEC panel met on Sunday to discuss the state of the market.
The UAE—OPEC’s fourth-largest producer after Saudi Arabia, Iraq, and Iran—currently produces just below 3 million bpd. At 2.972 million bpd in August, its oil production increased by 12,000 bpd from July, according to OPEC’s secondary sources.
The UAE is also investing in additional crude oil storage, Al-Mazrouei told Platts, but noted that the country would not overproduce. Instead, it would lift its production only if there is demand for such increase.
The UAE and other countries are not worried about market instability if they have spare capacity, the minister said, adding that his country would invest some US$109 billion in upstream projects over the next four to five years.
Despite the spare capacity of some OPEC members, “We are not going to come back and significantly oversupply the market and create that imbalance again,” Al-Mazrouei told CNBC on the sidelines of the OPEC/non-OPEC panel meeting on Sunday.
According to the plans, by the end of the year, the UAE will have a spare production capacity of 500,000 bpd, which, estimates by Platts show, would be the second-highest after that of Saudi Arabia.
Russia, the leader of the non-OPEC group in the production cut deal, can bring “a couple of hundred thousand barrels” in the short term, by December this year, Russian Energy Minister Alexander Novak told Bloomberg in an interview this weekend.
Nevertheless, the participants in the deal will look first into demand before making any additional decisions on supply, said Novak, who also noted that the market may be “in a small deficit, but overall stable.”
Saudi Arabia—which holds the world’s largest spare oil production capacity—said that it would boost oil production over the next three months because it expects demand to be stronger.
The Saudis claim that their spare production capacity is between 1.5 million bpd and 2 million bpd. The problem with this estimate is that it has never been tested.
Saudi Arabia’s all-time high oil production is 10.72 million bpd, achieved in November 2016 just before the OPEC+ deal entered into force. In August 2018, the Saudis pumped 10.4 million bpd, as per OPEC secondary sources data.
The EIA defines spare capacity as the volume of oil production that can be brought online within 30 days and sustained for at least 90 days.Related: What Will Trigger The Next Oil Price Crash?
According to the International Energy Agency (IEA) estimates, OPEC countries have a combined 2.7 million bpd of spare production capacity, of which 60 percent is in Saudi Arabia.
“But the point about spare capacity is that, having been idle, it is not clear exactly how much, beyond what is widely thought to be ‘easy’ to bring online, will be available to coincide with further falls in Venezuelan exports and a maximisation of Iranian sanctions,” the IEA said in its latest monthly Oil Market Report.
The market is tightening, and it’s expected to further tighten by the end of the year thanks to Iran and Venezuela, but OPEC and Russia are not rushing to tap into spare capacity, because leaving it tight could raise the risk of a spike in oil prices in case of another outage somewhere.