OPEC+ Spare Capacity is a Bah Humbug for Oil Bulls
- U.S. oil production finishes the year strong
- Historically high OPEC+ spare capacity limits rallies during 2024
- Natural Gas futures rise on strong exports and colder weather
- POWERHOUSE wishes all of our Weekly Market Situation readers a VERY HAPPY HOLIDAY SEASON!
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The Matrix
It has been a challenge to excite the oil market bulls this year. Not for a lack of market-moving headlines. This year witnessed missiles launched from and at Iran. Tanker traffic in the Red Sea threatened by Houthi rebels. Russian oil installations and Ukrainian energy infrastructure attacked. Global oil inventories are poised to finish 2024 at the lowest level since 2017. And yet, prices are trading relatively sideways. Oil market participants’ lack of anxiety is due to OPEC+’s most pressing worry: excess spare capacity.
OPEC spare capacity is the oil market’s rainy-day fund. Some of oil’s most impressive bull markets have occurred on the back of low OPEC spare capacity. 2003-2008 was one of those periods. China emerged as a formidable source of new demand growth. As China prepared to hold the Summer Olympics in 2008 in Beijing, the government wrote a blank check for infrastructure, and WTI crude traded over $100 for the first time.
When Russia invaded Ukraine, the market was unprepared for the shock. Investments in exploration and production fell after the Covid-19 pandemic. Spare capacity within OPEC was already low as sanctions were levied on Russian oil, and prices skyrocketed.
As we have said before, high price tends to be the best cure for high price, which brings us to today. Non-OPEC production set a new record this year, led by gains in the U.S. Technological improvements mean we can produce more with fewer rigs. The U.S. recently produced a record 13.61 million barrels per day, more than any other country ever.
OPEC+ has decided to sacrifice market share to support price. The IEA reports OPEC’s spare capacity is around 6 million barrels per day, and Saudi Arabia is holding back the lion’s share. The decision to continue to support price by voluntarily cutting production was extended into 2025.
The work of a cartel is not easy. That is why most tend to fail. In the days leading up to the U.S. election, the Kingdom warned its fellow OPEC+ members that if they did not hold up their end of the production cut bargain, $50 oil could be in the cards. Will the deal hold together as we approach a new year and a new administration? One thought is the Trump administration could put new sanctions on Iran, giving Saudi Arabia and the rest of OPEC room to produce, but even that would not clear the imbalance. As long as the overhang of OPEC spare capacity persists, it will be harder for oil bulls to toot their horns this new year in excitement.
Supply/Demand Balances
Supply/demand data in the United States for the week ending December 13, 2024, were released by the Energy Information Administration.
Total commercial stocks of petroleum decreased (⬇) 3.2 million barrels to 1.2332 billion barrels during the week ending December 13th, 2024.
Commercial crude oil supplies in the United States were lower (⬇) by 0.9 million barrels from the previous report week to 421.0 million barrels.
Crude oil inventory changes by PAD District:
PADD 1: Down (⬇) 0.5 million barrels to 7.5 million barrels
PADD 2: Up (⬆) 0.1 million barrels to 105.1 million barrels
PADD 3: Down (⬇) 1.7 million barrels to 233.4 million barrels
PADD 4: Unchanged (=) at 24.3 million barrels
PADD 5: Up (⬆) 1.1 million barrels to 50.7 million barrels
Cushing, Oklahoma, inventories were up (⬆) 0.1 million barrels to 23.0 million barrels.
Domestic crude oil production decreased (⬇) 27,000 barrels per day from the previous report at 13.604 million barrels per day.
Crude oil imports averaged 6.649 million barrels per day, a daily increase (⬆) of 665,000 barrels. Exports increased (⬆) 1,796,000 barrels daily to 4.895 million barrels per day.
Refineries used 91.8 percent of capacity; a decrease (⬇) of 0.6 percent from the previous report week.
Crude oil inputs to refineries decreased (⬇) 48,000 barrels daily; there were 16.611 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, decreased (⬇) 105,000 barrels daily to 16.828 million barrels daily.
Total petroleum product inventories decreased (⬇) by 2.3 million barrels from the previous report week, up to 812.1 million barrels.
Total product demand increased (⬆) 662,000 barrels daily to 20.820 million barrels per day.
Gasoline stocks increased (⬆) 2.3 million barrels from the previous report week; total stocks are 220.0 million barrels.
Demand for gasoline increased (⬆) 117,000 barrels per day to 8.927 million barrels per day.
Distillate fuel oil stocks decreased (⬇) 3.2 million barrels from the previous report week; distillate stocks are at 118.2 million barrels. EIA reported national distillate demand at 4.498 million barrels per day during the report week, an increase (⬆) of 1,048,000 barrels daily.
Propane stocks fell (⬇) 3.0 million barrels from the previous report to 90.1 million barrels. The report estimated current demand at 1,281,000 barrels per day, a decrease (⬇) of 402,000 barrels daily from the previous report week.
Natural Gas
Natural Gas futures traded above resistance of $3.563 last week on the prospect of colder weather and strong LNG exports. Prices have been increasing for most of December, while open interest (represented by the green histogram at the bottom of the accompanying chart) has been falling. Recent price strength has been on short covering instead of new money fueling the rally. $4.00 is next resistance, a level that has not traded since the start of 2023.
According to the EIA:
- Net withdrawals from storage totaled 125 Bcf for the week ending December 13, compared with the five-year (2019–2023) average net withdrawals of 92 Bcf and last year’s net withdrawals of 78 Bcf during the same week. Working natural gas stocks totaled 3,622 Bcf, which is 132 Bcf (4%) more than the five-year average and 20 Bcf (1%) more than last year at this time.
- According to The Desk survey of natural gas analysts, estimates of the weekly net change to working natural gas stocks ranged from net withdrawals of 117 Bcf to 147 Bcf, with a median estimate of 130 Bcf.
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