Supply crunch to test OPEC’s spare capacity
Oil prices opened Monday with some gains as markets await the outcome of trade negotiations between the world’s two largest economies. International benchmark Brent crude was trading at $70.97 per barrel at 0630 GMT with a 0.5% gain after closing Friday at $70.62 a barrel. American benchmark West Texas Intermediate was at $61.72 a barrel, posting a 0.6% increase, after ending the previous session at $61.33 per barrel.
Trade negotiations between the US and China have put investors on their heels in recent weeks, especially since Friday when the US increased the tariff rate from 10% to 25% on $200 billion worth of Chinese imports. If the US-Sino trade talks fail, it would first negatively impact Asian countries, and could subsequently slow global economic growth. The failure to reach a trade deal threatens both global oil demand and the respective oil consumption of China and the US.
The US and China together represented approximately 34% of global oil consumption in the first quarter of 2019, according to the International Energy Agency. On the supply side, the US’ sanctions on Iran and Venezuela, together with production cuts from OPEC and Russia, keep oversupply low on the global market. If OPEC and its allies this month signal a production extension into the second half of 2019, oil prices could be prevented from falling further.
Oil production capacity could fall to under one percent of global oil demand by the end of the year if OPEC compensates falling production from Iran and Venezuela, leaving oil prices exposed to sharp swings in the event of unplanned outages.
Spare capacity is the extra oil a producing country can bring onstream and sustain at short notice, providing global markets with a cushion in the event of natural disaster, conflict or any other cause of an unplanned supply outage.
Very few oil producers hold spare capacity, with Saudi Arabia, the largest producer in the Organization of the Petroleum Exporting Countries, and the world’s biggest oil exporter, holding the lion’s share. — VoM