Paul Sheldon
Regarding US President Biden’s upcoming visit to Saudi Arabia, despite speculation of a resulting production increase, we do not expect Saudi Arabia to raise its quota beyond the historically high 11.0 million b/d from August-December. While a non-binding announcement to raise supply in the event of future disruptions would be unsurprising, dwindling spare capacity and a Saudi desire to keep Russia within the Opec+ framework will likely keep talks more focused on geopolitical cooperation to contain Iranian aggression in the Middle East.
Under the current Opec+ deal, which runs through end-2022, a 648,000 b/d quota hike in August will be the final production increase of the year. By August, we forecast global spare capacity to fall to 1.2 million b/d (0.5 million b/d in Saudi Arabia, and 0.7 million b/d in the UAE). This market buffer only exceeds a few periods in history: most notably the aftermath of Gulf wars in 1990 and 2003, the price run-up of 2008, and when Saudi Arabia produced its all-time quarterly high of 10.9 million b/d Q4 2018. Even these headline spare capacity levels are untested, and likely available for just a few months.
• On August 1, Opec+ quotas will increase by 648,000 b/d over July, completing the final quota hike envisioned under the historic April 2020 production cut deal. By August, the full 9.6 million b/d of headline cuts implemented in May 2020 will be fully unwound (excluding 400,000 b/d for Mexico, which left the deal in July 2020). Therefore, theoretically, the original production baselines for each of the 19 participating countries, which were mostly derived from October 2018 output levels, will be recovered completely (a July 2021 compromise agreement with the UAE increased baselines for the five largest producers as of May 2022, but as described in our March 30 Spotlight the supply impact was far less than originally assumed).
• However, total Opec+ capacity is already well below the level implied in the agreement (both through collective baselines and full quotas as of August 2022). Specifically, we estimate full production capacity in August (after stripping out seasonal maintenance and disruptions) at a combined 40.2 million b/d, or 1.9 million b/d below official quotas of 42.1 million b/d.
Even this discrepancy does not tell the whole story, as two countries possess capacities well above their August quotas (Saudi Arabia at 480,000 b/d and the UAE at 830,000 b/d). The other 17 participating Opec+ members’ combined capacities fall 3.2 million b/d below their total quotas, 1.2 million b/d of which comes from Russian shut-ins and inflated quota 11.0 million b/d. This leaves world’s only notable spare capacity in Saudi Arabia and the UAE.
{The author is Chief Geopolitical Adviser, Analytics at S&P Global Commodity Insights]
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