Oil market realizing many OPEC producers may not have the capacity to boost output much further By Tsvetana Paraskova for Oilprice.com© Getty Images / Bloomberg/ Andrey Rudakov

As the OPEC+ group unwinds its production cuts, the oil market has realized that not only do many producers in the pact lack the capacity to boost output further, but those who can pump more are reducing the global spare production capacity, thus exposing market balances to unexpected supply disruptions, and oil prices to further spikes. Most of the world’s global spare capacity is currently held by OPEC’s Middle Eastern members Saudi Arabia and the United Arab Emirates (UAE). Those two producers have the potential to raise their output as OPEC+ continues to unwind the cuts, but they are doing so at the expense of declining spare capacity.

Low spare production capacity could set the stage for a prolonged oil price rally because the world would have a lower buffer to offset sudden supply disruptions, which are always lurking in the global oil market.

The unrest in Kazakhstan and the blockade in Libya in the past month highlighted the challenge that the oil market will be facing if spare capacity continues to shrink. And shrink it will—that is, if OPEC+ continues to add 400,000 barrels per day (bpd) to its production quota every month until it unwinds all the cuts.

Higher OPEC+ Production Means Lower Spare Capacity

The problem with OPEC+ is that only a handful of producers can keep some capacity in reserve while raising production. The few who can include OPEC’s top producer and the world’s largest oil exporter, Saudi Arabia, the UAE, and to some extent, Kuwait and possibly Iraq. Iran, under US sanctions, has over 1 million bpd that could return to the market. But Iran will be able to tap that capacity only if the ongoing nuclear talks are successful—a development that many analysts doubt will occur anytime soon. (RT)