There were many reasons for the record breaking run in crude oil futures this week from concerns about Russian oil producer Yukos to a new holy war against the British army in Basra by Islamic militants but they were all related to the same factor: the lack of spare capacity in the oil production and refining system.
This has made Opec, the oil cartel, and oil markets very nervous.
“If there was enough spare production capacity Yukos would not be a factor on oil prices,” said Adam Sieminski, energy strategist at Deutsche Bank.
IPE Brent crude futures for September delivery smashed a 14-year record this week of $40.95 a barrel on the way to peaking at $41.50 on Friday, its highest level since the contract was launched in 1988. The price is up 43 per cent since the start of the year.
September Nymex WTI moved within a whisker of $45 a barrel on Friday when it peaked at $44.77, a rise of 36 per cent since the end of June.
Having a buffer of idle oil-producing capacity has given the Organisation of Petroleum Exporting Countries its power to influence prices since the oil cartel was formed in 1960. Opec was able to turn on the oil taps in the Gulf war and last year during the Iraq war to cool soaring prices.
For the past four months Saudi Arabia, which carries the bulk of global spare capacity, has tried totalk prices down by promising that more oil is on the way. The kingdom has increased output in recent months but higher rates of production have inadvertently eaten into spare capacity.
Nawaf Obaid, a security consultant to the Riyadh government and author of The Oil Kingdom at 100: Oil Policymaking in Saudi Arabia, wrote this week in the Financial Times that the kingdom was currently producing 9.8m barrels a day and its current maximum sustained output was 10.2m b/d.
On this measure it leaves total global spare oil producing capacity at around 400,000 b/d, or less than a third of the 1.5m b/d Opec claimed this week it could add to current output levels. This is less than 1 per cent of current global oil output, and less than the 1.7m b/d Yukos produces.
“People are now saying that if Yukos stops producing, it's the equivalent of the entire spare capacity disappearing,” said Mr Sieminski.
However, Saudi Aramco, the national oil company of the kingdom, tried to reassure oil markets this week when it said it was bringing on two new oil fields ahead of schedule. This initially calmed oil traders on the floor of the two largest energy futures exchanges, the International Petroleum Exchange in London and the New York Mercantile Exchange.
But the Saudi Aramco announcement was a repeat of what the oil company claimed three months ago. On May 26, Saudi Aramco said the Qatif and Abu Sa'fah projects were slated to go into production months ahead of the original forecasts of October 2004.
The fields are hardly new either. Ann-Louise Hittle, head of macro oils at Wood Mackenzie, the oil consultancy, said the Qatif field first produced oil in 1946 and remained open until 1983, a period when oil demand and prices slumped following the effect of the second oil shock and prices of about $80 in today's terms.
Ms Hittle said the field opened again between 1990 and 1993. At its peak in 1979 it produced 140,000 b/d, and Abu Sa'fah is already pouring 150,000 b/d. Saudi Aramco claimed the two fields would ultimately produce 800,000 b/d, boosting the kingdom's spare capacity.
Along with Qatif and Abu Sa'fah, other Opec members are also planning to bring on additional production by the end of the year, Ms Hittle said.
“The third quarter is going to be the tightest, but from the fourth quarter we should see more oil coming on stream to cater for the increase in demand in the lead-up to winter.”
Wood Mackenzie estimates Opec capacity will increase by about 1.5m b/d to average 32.07m b/d in the final quarter, more than 2m b/d above current output.
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