Spare Production Capacity Going To All-Time Lows

While the markets await the outcome from the Fed meeting and oil traders fret about whether OPEC and Non-OPEC might raise production and the weekly supply report, the biggest threat to the price of oil and the global economy may be the lack of spare oil production capacity. While the International Energy Agency (IEA) and OPEC and the Energy Information Administration (EIA) released reports that show they are confused about the outlook for demand, the truth is that OPEC and Non-OPEC decided to raise oil output, the amount of oil that the world can bring on quickly will be almost non-existent.

Reuters reports that global spare oil production capacity could fall from more than 3 percent of global demand now to about 2 percent, its lowest since at least 1984, if the Organization of the Petroleum Exporting Countries, Russia and other producers decide to increase output when they meet on June 22-23, quoting U.S. Bank Jefferies. Some analysts say spare capacity could even fall below 2 percent, after years of low oil prices drove down investments in new production across the industry to a historic low. These numbers are very much in line with what we are looking at and it is a situation that we have warned was going to develop for some time.

In other words, the risk for oil price spike based upon weather or geospatial events, is higher than it’s ever been. While the U.S. shale producers are the main reason that we have any spare capacity at all, their ability to sharply increase production in a short time to meet a supply disruption does not exist.

Speaking about weather outlook, we are on storm watch in the Gulf of Mexico. Top futures weather forecaster Michael Schlacter says that a disturbance in the Gulf of Mexico is very much like "Alberto" in May. The western Caribbean & Yucatan region continues to be ripe for Tropical development; we're monitoring disturbances that pose a risk to the Gulf of Mexico.

In the Eastern Pacific you have Hurricane Bud, which poses only a minimal risk to oil installations but according to Schlacter will bring storminess and copious rains to western Mexico and up into the Desert Southwest; this will act to enhance Ridging/Heat for the Pacific Northwest and USA East-of-Rockies. Micheal is the man when it comes to weather.

So many oil agencies are reporting on the same things and sometimes adding more confusion. The International Energy Agency (IEA) has a lower projection for global demand than any other agency. That should not be a surprise because they almost always do and they are almost always wrong. The IEA says that global oil demand growth for 2019 of 1.4 mb/d, is similar to this year’s level., which they missed. Of course, they say there are downside risks: these include the possibility of higher prices, a weakening of economic confidence, trade protectionism and a potential further strengthening of the U.S. dollar.

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