The Fuse

Trump, OPEC, and the Oil Market’s Razor Thin Spare Capacity

by Matt Piotrowski | July 03, 2018

Over the weekend, President Donald Trump tweeted that Saudi Arabia agreed to increase crude oil production by 2 million barrels per day (Mbd) to cool high oil prices and make up for supply shortfalls due to current outages in Venezuela and future supply losses in Iran. Both the administration and the Saudis later clarified the dialogue between the two sides, explaining that Saudi Arabia stated it has 2 Mbd of extra capacity to add global markets when necessary.

Trump, in an interview with Fox News, persisted in his criticism of the OPEC cartel, pointing out that producers in the group have manipulated supply and artificially inflated prices. “Don’t forget the one negative to the Iran deal is that you lose a lot of oil, and they [the Saudis] got to make up for it,” Trump said on Fox. “And who is their big enemy? Iran. OK. You think of it. Iran is their big enemy, so they [Saudis] are going to have to do it.”

“Asking the cartel to increase output is like trying to put a Band-Aid on a broken system that shouldn’t even exist in the first place.”

In response to the recent comments, Robbie Diamond, SAFE’s CEO and President, said in a statement: “Asking the cartel to increase output is like trying to put a Band-Aid on a broken system that shouldn’t even exist in the first place. Even if there is short term relief by an agreement to increase output, it is a demonstration once again that U.S. sovereignty is undermined by foreign interests who control global oil supply, reducing our control over our economy, our foreign policy, and our future.”

There are two key takeaways from the most recent exchange between the world’s largest consumer and the world’s swing supplier.

First, the United States, because of its vulnerability to world oil prices, has to once again request that the Saudis increase production, compromising Washington’s leverage while conducting foreign policy. This reflects how petroleum dependence remains a national and economic security threat despite U.S. crude oil production more than doubling in the past decade and reaching a new record this year.

Although the Saudis state that they have 2 Mbd of spare capacity, they have never utilized it on a sustained basis.

Second, the international oil market—now trading just below $80 per barrel—has tightened considerably in the past year, and could reach new heights in coming months. Along with OPEC+ curbing output by 1.8 Mbd, Venezuela’s crude oil production continues to decline and could soon drop under 1 Mbd, depriving the market—and specifically U.S. refiners—of a major oil supplier. Reinstated sanctions against Tehran may cut a full 1 Mbd out of the market, and lately, Libya’s problems have resurfaced, with output falling by 850,000 barrels per day (b/d) amid continued armed conflict.

Although the Saudis state that they have 2 Mbd of spare capacity, they have never utilized it on a sustained basis. With this in mind, it’s unclear if the Kingdom can effectively offset all shortfalls. Saudi Arabia is currently producing slightly above 10 Mbd, right at its OPEC quota. The highest annual average for the country was 10.46 Mbd in 2016.

Against this backdrop, the oil market could be sorely tested in the second half of the year and into 2019, unless demand slows, OPEC outages are less than expected, or non-OPEC producers such as the United States, Canada, and Brazil produce higher than forecast. Analysts warn of increased tightness ahead, and some are once again suggesting that triple-digit oil prices are a realistic possibility. The oil market is on a razor’s edge.

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