Efforts by the Organization of Petroleum Exporting Countries to satisfy world demand for crude this summer had the "unintended consequence" of reducing its spare production capacity, analysts said June 30.
If the 10 OPEC countries that are still subject to production quotas maintain their projected June output level of 27.5 million b/d, the group's spare crude oil capacity will shrink to an estimated 800,000 b/d in the third quarter from 1.6 million b/d in May, according to a detailed analysis by Edinburgh-based consultant Wood Mackenzie Ltd. Only Iraq is currently exempt from quota restrictions.
"As a result, the capacity crunch has indirectly heightened the potential impact of any terrorist attack or political unrest on supply flows and international oil prices," WoodMac analysts said.
In a separate report released June 30, analysts at Merrill Lynch Global Securities Research & Economics Group, New York, also noted the erosion of OPEC's spare production capacity. "Disappointing non-OPEC supply growth and surging demand growth have significantly increased the call on OPEC oil," they said. "While higher output levels should eventually lead to a restocking in inventories, the higher oil production level has significantly reduced the spare capacity cushion within OPEC."
Merrill Lynch analysts reported, "Current spare capacity of 1.3 million b/d is the lowest it has been over the past 3 years. The last time OPEC spare capacity was challenged to this degree was during the December 2002-March 2003 time period, when disruptions in Venezuela and Iraq reduced output from those two countries by as much as 2.7 million b/d combined."
The key difference between that earlier period and the current environment "is that today there are no short-term supply disruptions that will soon reverse. Instead, today's lack of spare capacity is a result of much higher-than-expected demand," Merrill Lynch analysts said.
"The risk of further geopolitical threats to OPEC nations' oil production infrastructure remains significant," said Ann-Louise Hittle, head of macro oils at WoodMac. "Iraqi oil exports remain vulnerable to attacks on both its southern and northern export outlets. Elsewhere in the [Persian] Gulf [area], continued assaults against Saudi Arabia's expatriate community are occurring, and damage to its oil infrastructure cannot be ruled out. As the source of the largest share of spare capacity, interest is focused particularly on events in Saudi Arabia," officials said.
Venezuela also is a political risk, with President Hugo Chávez facing an Aug. 15 recall referendum that may trigger civil disturbances, which could threaten oil exports once again.
Merrill Lynch June 30 raised its 2004 average US futures oil price forecast to $34.40/bbl from $31.60/bbl previously, on the assumption of no major supply disruptions. "Given limited spare capacity, a price spike above $40/bbl is possible should prolonged production outages occur in Iraq, Venezuela, or Nigeria," analysts said. However, WoodMac analysts said there are three distinct trends emerging that should lessen the impact of any loss of oil supplies as the year progresses:
• A sharp production increase in the third quarter by the 10 OPEC members subject to quotas should build stocks at a more substantial rate than in the last few quarters.
• Production capability of the so-called OPEC 10 is expected to rise to 29.7 million b/d by the fourth quarter, boosting spare capacity to about 2.2 million b/d. Including Iraq, fourth quarter capacity could increase to 32.1 million b/d.
• WoodMac estimates the OPEC 10 could produce "on a surge basis" at 30.94 million b/d by the fourth quarter. This represents spare capacity of 3.4 million b/d compared with June output.
