Spare capacity in focus as US ramps up pressure on Opec
TRUMP HAS BEEN PRESSURING THE GROUP TO INCREASE PRODUCTION TO COOL PRICES
Though US President Donald Trump has been pressuring the Organisation of Petroleum Exporting Countries (Opec) to increase production to lower oil prices, utilisation of spare capacity could have consequences for oil markets, analysts told Gulf News.
Trump has been pressuring Opec and its allies to increase production to cool prices, which are currently trending at a four-year high of above $82 (Dh301) per barrel.
In a tweet last week, Trump criticised the Opec group and asked them to get prices down.
The US president made similar comments at the UN General Assembly meet and also spoke to Saudi Arabia’s King Salman on Saturday to discuss efforts being made to maintain supplies to ensure oil market stability and global economic growth.
But analysts feel that it would be difficult for Opec to raise production as its members would be deprived of spare capacity that can be utilised to counter any supply shortages arising in future.
“Opec plus members [including Saudi Arabia] are cognisant that the utilisation of their spare capacity is a doubleedged sword,” said Ehsan Khoman, head of Mena Research and Strategy at MUFG Bank Ltd.
‘Supply crunch’
“On the one side, it can be used to adhere to US calls to lower prices by raising supply, but on the other hand, it increases the market risk premium regarding the concerns that by bolstering output to near maximum levels, then there will be little extra headroom to manoeuvre to counter any supply-side outages, and in essence creating a supply crunch,” he added.
According to him, Saudi Arabia is currently producing 10.4 million barrels per day and has 1.5 million barrels per day of spare capacity .
“Increasing it to near capacity limits has never been demonstrated, and it would mean using almost their entire capacity, which for us is significant uncharted territory,” he said.
Global benchmark Brent is currently trading at a four-year high at more than $82 per barrel with US Crude West Texas Intermediate at $73.25 barrel when markets closed on Friday.
Commodity traders Trafigura and Mercuria predict Brent will rise to $90 per barrel by Christmas and pass $100 in early 2019 as markets tighten once US sanctions against Iran are fully implemented from November.
“The sanction on Iran is going to be much more intensive than we expected. The pressure on the increase in oil prices is becoming much more now,” said Jaafar Al Taie, managing director of the UAE-based Manaar Energy Group.
“India saying that it is going to cut zero imports from Iran is making all the difference. This is going to have a huge impact on the oil price. We have to see what spare capacity Iraq and Saudi Arabia will bring to the market to compensate for the loss of Iranian barrels towards the end of 2018.”
India is the second biggest buyer of Iranian oil with imports touching more than 500,000 barrels per day in 2018. Indian Oil Corporation and Bharat Petroleum Corporation, the country’s two largest state-owned refiners, haven’t asked for any Iranian cargoes for loading in November, media reports said.