Industry Trend Analysis - OPEC Spare Capacity No Threat To Brent - MAR 2018

BMI View : OPEC holds sufficient spare capacity to tip the global oil market from deficit to surplus in 2018. However, we see a low probability of this capacity being brought into play, given continued strong commitment to the OPEC cut deal from Saudi Arabia and its GCC allies.

The rise in oil prices (with Brent touching USD70.0/bbl in intra-day trading) has raised concerns over compliance slippage with the 1.80mn b/d OPEC, non-OPEC production cut deal (see ' Brent: Q1 Weakness, H2 Strength ' , January 10). Based on our estimates, OPEC holds around 2.19mn b/d of spare production capacity, within which we include any crude barrels that could be brought to market within six months. Our estimate is relatively conservative, when compared to some other agencies (see chart below) - however, this may in part be down to differing definitions of spare capacity.

All major agencies estimate spare capacity upwards of 2.0mn b/d. When we add on Russia, our own estimate rises to 2.50mn b/d. To put this in context, we forecast global net supply growth (for crude, condensates and natural gas liquids) of 1.27mn b/d for 2018 on an annual average basis. US shale growth - to which both OPEC and prices are more sensitive - we put at 390,000b/d y-o-y. By both these measures global spare capacity is substantial. And, significantly, the deployment of this capacity has the potential to swing the global oil market from a small deficit into a large surplus. In our view, though, this is unlikely to happen.

Estimates Vary Widely
OPEC Spare Crude Oil Production Capacity, '000b/d
Source: Bloomberg, BMI, EIA, IEA

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