Living On the Edge: OPEC Spare Capacity

It’s time for some straight talk on the oil supply. On September 12th the Organization of Petroleum Exporting Countries (OPEC) announced that they would raise production 522,000 barrels per day (b/d) to alleviate demand-side pressures in the 4th quarter of this year. Few people in the oil markets were impressed by this conciliatory gesture, for the Nymex price for light, sweet crude closed at $80.09 a barrel on Thursday, September 14th. Let’s examine the oil market conditions driving the rising oil price. Demand is strong and slated to increase as winter approaches. On the supply-side, the most important factor is how much surplus production capacity OPEC can bring to bear to ease prices should they choose to do so.
Short-term price movements are insignificant1 because they are influenced by ephemeral events such as profit-taking and reactions to weekly inventories. The longer term price trend is significant (graph from tradingcharts.com, left) because it tells us about the evolving supply & demand balance. The market has been increasingly out of balance for more than 7 years now, as the price signal indicates. The sharp dip in prices that took place last fall/winter was an anomaly in a volatile market when viewed from a longer term perspective. The price trend has resumed its up-and-down but inexorable rise since the recent low point in January, 2007