The drone attacks in Saudi oil facilities on Saturday left the world with no spare production capacity. The strike cut Saudi’s oil output by 5.7 million bpd, roughly half of the kingdom’s production capacity. It also restricted Saudi’s ability to use its spare oil production capacity.
Saudi Arabia has long been the only oil producer that has held significant spare production capacity. Saudi can start the spare capacity quickly in the event of supply disruption due to war or natural disaster. Other countries cannot afford to maintain expensive drilled wells and oil infrastructure idle.
Before the strikes, OPEC holds 3.21 million bpd of spare oil production capacity, with Saudi keeping 2.27 million of it. The attacks leave around 940,000 bpd of spare capacity held by the UAE, Kuwait, Iraq, and Angola. They may have started them but that will not be enough to compensate for the lost Saudi’s output, let alone a further disruption.
OPEC+ has cut production to support oil prices, aiming to cut output by 1.2 million bpd. However, much of the cut came from Saudi Arabia and cannot be reversed immediately. Other producers such as Russia have been operating near their maximum rates, with approximately 100,000-150,000 bpd of available additional output, according to Reuters estimates.
Iran also holds spare capacity, but US sanctions make it impossible to release it to the market. The attacks also heightened tensions between the two countries. Besides, US sanctions prevent Venezuela to export its crude, but production from the South American country has been in free fall. State-controlled PDVSA is unlikely to be able to boost output even if the sanctions are lifted.
US shale producers can raise production in a matter of months if Saudi outages seem to be prolonged and cause crude prices to rally. However, US port capacities are near their maximum, providing constraints on how much the US can deliver its crude to the market.
Luckily, the oil market is currently very well-supplied. JP Morgan estimates that a 5 million-bpd outage will require five months to bring global crude oil supply levels back to a 40-year average. However, there is a persistent threat to the oil market volatility. Another disruption from Libya, which has been in the middle of a civil war, will intensify the shock in the global oil market.
In the absence of spare production capacity, further disruption will push oil prices upwards. Higher prices will provide incentives for oil companies to invest and produce more oil , while at the same time dampen consumption.
