(yes, another oil post – it’s been a while…)
I’ve been writing about the very low spare capacity in oil production, as shown by that graph from the recent survey on oil by the Economist:
Now OPEC is admitting that there will be no spare capacity later this year.
At full capacity, Opec `may not meet Q4 need’ (Gulf Times, 9 May 2005)
ALGIERS: Even if Opec pumps at full capacity it may not be able to meet strong fourth quarter demand without sufficient inventories being built up beforehand, Algeria’s oil minister has said.
Chakib Khelil said he was not concerned by the current situation in the oil market, but rather about the fourth quarter, which traditionally sees a sharp rise in demand due to cold weather.
"Let’s assume we go to a maximum (in output) and assuming we don’t have any (significant) stocks, we are not going to meet demand in the fourth quarter," Khelil said on the sidelines of an energy ceremony in the capital Algiers.
"What you need to do is raise stocks in the third quarter to accumulate enough of them in the third quarter that you can deplete stocks and maintain a high level of production for the fourth quarter. That’s what I’ve been saying we need to do," he said.
…
"People are still worried that despite that we will be producing at full (capacity) we are not going to meet (demand), that’s what people are worried about and they are also worried about what will come next year," Khelil said.
"They have to be concerned because we are not going to have any surplus capacity available so anything could happen during the first quarter and that’s showing in the market," he said.
Khelil said a strong global economy, with oil demand driven by the US and China, meant prices would remain high.
"The only way we are going to have a slack in prices is if the economy really slows down," he said.
And a second oil minister weighs in in a similar vein:
Oil prices up on speculation about demand (Business Week)
Prices were given an upward nudge after Qatar’s oil minister, Abdullah Hamad al-Attiyah, raised concerns over the Organization of Petroleum Exporting Countries’ capacity to deal with demand for the next Northern Hemisphere winter, when global consumption peaks.
"OPEC is at its highest production in history. I am concerned about that. If we reach the full capacity now, we will tighten in the fourth quarter," Dow Jones Newswires quoted al-Attiyah as saying. "The spare capacity will be smaller and smaller, reaching a plateau when there is no more oil."
OPEC pumps around 40 percent of world oil and raised production to about 30 million barrels daily this year in an effort to boost stocks and steady prices ahead of summer. The increased production has some analysts concerned that OPEC is pumping at full tilt, with no spare capacity in the event of an unscheduled outage or a sudden rise in global demand.
This is why the markets did not go down last month when OPEC announced two production increases within a few days – they interpreted that as a capitulation by OPEC, i.e. an acknowledgement that production would be insufficient in the second half of the year (where consumption is traditionally, for seasonal reasons, higher than in the first half), and that it was thus necessary to increase production now, despite the lower current demand, to build up stocks to be drawn upon later in the year.So the fact that stocks are growing to record levels today is not good news, it’s the last tool available to make supply match demand throughout this year – it gives producers a few more months to increase their production to catch up, but there is no reason to think that they will be able to do it any better next year than this one.
THIS IS IT. THERE IS NO MORE SPARE OIL PRODUCTION CAPACITY. It will take a massive recession (which is increasingly likely, but that will only punch back the problem by a couple of years) or a violent increase in oil prices for demand to slow down and adjust to available supply.
In the meantime, volatility is likely to go up tremendously as any temporary disruption in oil flows will have an IMMEDIATE impact on prices (see today’s situation when a power cut in a refinery sent the oil price up by more than 2%).
Do not believe the pundits saying that stocks being high is a good thing. Get ready for serious upheavals.
And 2 OPEC ministers the same day? Either they like living dangerously by talking the price up, or they are desperately trying to warn us that the supply side cannot cope anymore and it’s high time for US to do something on the demand side…