OPEC+ spare capacity could dampen oil markets

The crude oil market is facing a critical moment, driven by escalating geopolitical tensions in the Middle East and questions about global spare production capacity. Traders are caught between the potential for significant supply disruptions and the possibility that OPEC+ and other producers may step in to ease the shortage. As the conflict threatens key oil-producing regions, market participants are watching closely for signs of both rising prices and stability.

The Middle East Conflict: A Looming Supply Disruption

In recent days, crude oil prices have risen amid the escalation of conflict between Israel and Iran. The geopolitical landscape has become more dangerous, with the potential for a wider Middle East war increasingly likely. Israel’s military actions against Hezbollah and threats to Iran’s oil infrastructure have raised fears of major supply disruptions. If Israel were to strike Iran’s oil facilities, could it remove up to 4% of global oil supply, a significant market hit?

This threat is compounded by Iran’s recent missile attacks on Israel, and retaliation by Israeli and US forces appears imminent. The Strait of Hormuz, a critical point for global oil shipping, could also be affected if the conflict widens, further tightening supply lines. Analysts warn that a direct hit on Iran’s oil infrastructure would send prices soaring, with some speculating that crude could hit $200 a barrel. Given that approximately 20% of…

The crude oil market is facing a critical moment, driven by escalating geopolitical tensions in the Middle East and questions about global spare production capacity. Traders are caught between the potential for significant supply disruptions and the possibility that OPEC+ and other producers may step in to ease the shortage. As the conflict threatens key oil-producing regions, market participants are watching closely for signs of both rising prices and stability.

The Middle East Conflict: A Looming Supply Disruption

In recent days, crude oil prices have risen amid the escalation of conflict between Israel and Iran. The geopolitical landscape has become more dangerous, with the potential for a wider Middle East war increasingly likely. Israel’s military actions against Hezbollah and threats to Iran’s oil infrastructure have raised fears of major supply disruptions. If Israel were to strike Iran’s oil facilities, could it remove up to 4% of global oil supply, a significant market hit?

This threat is compounded by Iran’s recent missile attacks on Israel, and retaliation by Israeli and US forces appears imminent. The Strait of Hormuz, a critical point for global oil shipping, could also be affected if the conflict widens, further tightening supply lines. Analysts warn that a direct hit on Iran’s oil infrastructure would send prices soaring, with some speculating that crude could hit $200 a barrel. With around 20% of global oil passing through the Strait of Hormuz, any disruption in this region could paralyze international markets.

OPEC+ and spare capacity: the market safety net

While the risk of supply disruptions remains high, the current oil market buffer is spare capacity held by OPEC+ producers, notably Saudi Arabia and the United Arab Emirates. Is this spare capacity estimated at 5.86 million barrels per day (bpd), enough to cover a complete loss of Iranian supply? Has this cushion prevented prices from falling so far, even as tensions rise to levels not seen since the Gulf War?

OPEC+ has maintained its commitment to a gradual increase in production, which could help stabilize prices in the short term. However, the group’s ability to increase production is not without limits. Should the conflict escalate beyond Iran to involve other Gulf nations, OPEC’s spare capacity could quickly be threatened. The concentration of unused capacity in the Middle East adds a level of vulnerability to the global supply chain.

Demand Uncertainty: A Counterbalance to Supply Risks?

While geopolitical risks are driving prices higher, weak demand from major economies, particularly China, remains a bearish factor. China’s manufacturing activity contracted for five consecutive months, reflecting sluggish demand for crude oil. Despite government stimulus measures, there are few signs of a robust recovery in China’s oil consumption as the country continues its transition to electrification and decarbonisation.

In addition, the US Federal Reserve’s stance on interest rates supported the US dollar, putting further downward pressure on oil prices. A stronger dollar makes crude more expensive for holders of other currencies, reducing demand. Do Fed Chairman Jerome Powell’s recent comments suggest that future rate cuts will be smaller and more gradual, contributing to a cautious outlook for global demand?

This combination of weak demand and ample global supply, including rising US shale production, has kept prices from rising too strongly, even though the risk of a supply disruption from the Middle East is high.

US Shale Resilience and Global Supply

In addition to OPEC+ spare capacity, US shale production plays a critical role in maintaining global supply. US production is expected to hit a record 13.49 million bpd by the end of the year, accounting for 13% of global crude production? This increase in shale production provides a significant buffer against potential supply shocks from the Middle East.

However, US producers remain cautious, with no immediate plans to increase production in response to higher prices. Many are holding back due to concerns over OPEC+ production cuts and compliance issues within the group. The resilience of US shale, coupled with OPEC+ spare capacity, provides a safety net, but it is not without limits. If the conflict in the Middle East expands, even these buffers may prove insufficient.

Weekly light crude oil futures

Trend indicator analysis

The main trend is down. However, the removal of the minor top at $72.40 from the week ended September 12 confirmed the change in momentum to the upside. The main trend will change upwards on a trade through $80.71. A trade through $64.04 will cancel the reversal low and signal a resumption of the downtrend.

The long-term range is $88.21 to $61.98. The market is currently trading on the bearish side of its 50% level at $75.10. The price level is a potential trigger point for an upward acceleration.

The medium-term range is $61.98 to $82.43. The market is currently trading on the strong side of its retracement zone at $69.79 to $72.21, making it a new support.

Weekly technical forecast

The weekly direction of the light crude oil futures market at the end of the week of October 11 will likely be determined by the trader’s reaction to $72.21.

Optimistic scenario

A sustained move above $72.21 will signal the presence of strong counter-trend buyers. If this creates enough near-term momentum, then we could see a test of the major 50% level at $75.10. A break above this level with conviction could put potential targets at $77.76, $80.71 and $82.43 on the radar.

Bearish scenario

Failure to hold $72.21 will indicate a reversal for sellers. It will also confirm that the market is still in sell the rally mode. This could drive prices towards support at $69.79. If this fails, prices could crash to $64.04.

Outlook: Volatility ahead, but spare capacity may limit price increases

In the near term, the outlook for crude oil prices remains volatile. The ongoing conflict between Israel and Iran is the dominant factor influencing market sentiment. Should the conflict escalate, particularly if Israel strikes Iranian oil infrastructure, could prices exceed $100 a barrel and rise to $200 in the worst case scenario? The risk of supply disruption in the Strait of Hormuz further amplifies these fears.

That said, OPEC+’s significant spare capacity, along with record US shale production, provides a counterbalance to these risks. Unless the conflict spreads beyond Iran and threatens other Gulf states, this spare capacity should be enough to limit the rise in oil prices. As a result, while near-term increases are likely, sustained price increases may be tempered by the ability of OPEC+ and US producers to step in and fill potential supply gaps.

In conclusion, traders should prepare for continued volatility with the potential for sudden price swings driven by geopolitical headlines. The safety net of the spare capacity market will be closely monitored as any sign of a strain in OPEC+ or US production could shift the outlook from cautiously optimistic to aggressively bullish. For now, prices are expected to remain in the $70-$90 per barrel range, but the situation remains very fluid, with the potential for significant disruption going forward.