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Rising oil demand to outpace OPEC supply growth, shrinking spare capacity cushion: IEA

Highlights

OPEC to have just 2.4 mil b/d of idled capacity available by 2026

Neutral Zone to make Saudi Arabia capable of 12.25 mil b/d output

Fragile African OPEC members to see production declines

London — The world's growing thirst for oil, combined with lackluster upstream investment, will require OPEC to pump close to maximum capacity in the coming years, leaving the market more vulnerable to supply squeezes and disruptions, according to the International Energy Agency.

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Once oil demand rebounds from the pandemic, OPEC will need to boost its crude production by more than 20% from current levels to hit 30.8 million b/d by 2026, the IEA projected in its latest medium-term market forecast March 17.

The bulk of those increases will come from OPEC's core Gulf members, more than offsetting declines in more fragile African members and Venezuela, for a net gain of 1 million b/d of crude production capacity and 250,000 b/d of condensates and NGL growth. But global oil consumption is set to grow faster, the report stated.

"As demand recovers and upstream investments lag in other parts of the world, Saudi Arabia, Iraq, the UAE, and Kuwait may have to ramp up production to ensure the world is adequately supplied," the IEA said. "By the end of the forecast, the Gulf heavyweights may have to pump flat out to keep pace with demand if Iran remains under sanctions."

OPEC's 13 members produced 24.86 million b/d in February, according to the latest S&P Global Platts survey.

OPEC largely views its role in the market as a collective swing producer, adjusting its crude output to changes in demand, in an attempt to prevent economically destabilizing price spikes and crashes. It began teaming up with Russia and nine other allies in 2017 on a series of output cuts to counteract a slump in oil prices, in a so-called OPEC+ coalition that now controls just over half of global oil supply.

With producing countries outside the group less nimble in raising their output, in large part due to investment cuts across the industry forced by low oil prices, OPEC will be unable to keep as much of its production capacity in reserve as a cushion against supply volatility caused by civil unrest, natural disasters or other prolonged outages.

The IEA calculated that the bloc's effective spare crude production capacity will narrow to 2.4 million b/d by 2026, from 6.5 million b/d in 2020, the bulk of it in Saudi Arabia. The agency defines spare capacity as idled production that could be brought back online within 90 days and sustained for "an extended period."

The forecast assumes that Iran will remain under stringent US sanctions. A breakthrough in talks between the US and Iran that leads to sanctions relief could add up to 1.7 million b/d of Iranian crude supplies to the market, the IEA said, easing some of the tight OPEC spare capacity concerns.

"However, many contentious issues still need to be resolved before sanctions could be eased," the IEA noted.

Gulf gainers

Saudi Arabia, already the largest exporter of crude, will remain OPEC's -- and the world's -- primary swing producer, able to produce up to 12.25 million b/d once operations in the Neutral Zone it shares with Kuwait fully ramp up.

The IEA expects the call on Saudi crude to rise to 10.5 million b/d in 2026, giving it about 1.75 million b/d of reserve capacity. Saudi Arabia pumped at a 10-year low of 9.2 million b/d throughout 2020, in compliance with stringent OPEC+ quotas imposed as the coronavirus pandemic spiraled.

State oil giant Saudi Aramco has said it plans to raise its production capacity to 13 million b/d but has not revealed a timeline nor investment plans, though the IEA said that rising demand may prompt the kingdom to push several delayed oil field expansion projects back forward.

Iraq, OPEC's second largest member, is forecast to increase crude production the most in the bloc, by 1.3 million b/d to 5.4 million b/d in 2026, the IEA said. The country, which is attempting to rebuild from the destruction wrought by the Islamic State terrorist group, has ambitious plans to raise its production capacity, centered around megaprojects in the Basra oil region.

The UAE could see 1.2 million b/d growth in its output to 4 million b/d by 2026, while Russia, the main non-OPEC partner in the OPEC+ coalition, could boost output by 700,000 b/d to 11.3 million b/d, the IEA said.

Struggles in Africa

On the down side, OPEC's African members are expected to see continued declines, with the exception of Libya, which is emerging from years of civil war.

Libyan production has swiftly recovered to above 1 million b/d following the end of a rebel-led blockade on key oil ports, but further gains will be dependent on political stability and infrastructure repairs, the IEA said.

Angola will see the biggest fall in crude production capacity, down by 330,000 b/d from current levels, continuing a long slide as mature fields are exhausted, while Nigeria will see a 200,000 b/d decline due to underinvestment, the report stated.

OPEC production capacity

2020
2026
Change
Algeria
1.0
0.9
-0.1
Angola
1.4
1.0
-0.4
Congo
0.3
0.4
+0.1
Equatorial Guinea
0.1
0.1
0
Gabon
0.2
0.2
0
Iran
3.8
3.8
0
Iraq
4.9
5.5
+0.6
Kuwait
2.9
3.1
+0.2
Libya
1.1
1.3
+0.2
Nigeria
1.8
1.6
-0.2
Saudi Arabia
12.1
12.3
+0.2
UAE
3.7
4.2
+0.5
Venezuela
0.6
0.5
-0.1
TOTAL
34.0
35.0
+1.0

Unit: million b/d

Source: IEA

Note: Saudi Arabia and Kuwait figures include 50-50 share of Neutral Zone