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The Myth Of OPEC+ Spare Capacity

Sep. 18, 2021 12:53 AM ETCrude Oil Futures (CL1:COM)NG1:COM, UNG, USO, USL, DIG, DUG, ERX, XOP, XLE, PSCE73 Comments
Josh Young profile picture
Josh Young


  • OPEC+ likely has less spare capacity than represented.
  • Russia and Saudi Arabia examined more closely, biggest contributors.
  • Could lead to much higher oil prices.

As energy prices across the globe rise, many observers and pundits continue to downplay the possibility of a global energy supply crisis, often citing OPEC+ spare capacity as the panacea. The perception that OPEC+ is flush with spare capacity is pervasive. But due to a lack of reliable data and no formal reporting or verification requirements, many industry experts and analytics firms have adopted OPEC+’s self-reported numbers. No one knows exactly how much spare production capacity OPEC+ really has, and few seem interested, despite the potential implications.

In the last few months, I have shared my perspective and work indicating that OPEC+ has materially less spare capacity than advertised on financial TV and podcasts, in conference presentations, and elsewhere. Below, I explore this possibility in-depth, with a particular focus on OPEC+’s two most important producers, Russia and Saudi Arabia.

OPEC+ - Dominant Oil Cartel

OPEC+ controls about 50% of global oil supply, most of which comes from Russia and Saudi Arabia. The latter are known as “swing producers” because they can adjust their spare production capacity in response to changing market fundamentals. As of July 2021, EIA estimates that OPEC+ has 6.9M bbl/d of spare capacity, approximately 75% of which is controlled by UAE, Russia and Saudi Arabia. Saudi Arabia controls the lion’s share of the cartel’s spare capacity and therefore holds the most sway over major cartel decisions. Historically, there has been a negative relationship between oil price and spare capacity, as the cartel has reacted to rising prices by increasing production, and reacted to falling prices by withholding production.


Less Spare Capacity Than Advertised: Bison’s Differentiated View

OPEC+ has less spare capacity than advertised. What is left of the cartel’s spare capacity could be fully absorbed, as oil demand approaches pre-pandemic levels. Some of the evidence that informs this view is as

This article was written by

Josh Young profile picture
Josh Young is the Chief Investment Officer of Bison Interests, an investment firm focused on publicly traded oil and gas companies. And he is the former Chairman of the Board of Iron Bridge Resources, which sold to Warburg Pincus and CPPIB backed Velvet Energy in 2018 for $142 million. He is a value investor primarily focused on energy stocks, natural resources stocks, and companies trading at low multiples to earnings, cash flow, or book value. He has presented at numerous investment conferences, including Platts, LD Micro, Oil & Gas Money, Louisiana Energy Conference, and the Global Resources Investment Conference and has been featured in media including Barrons, Bloomberg, Business Insider, Fox Business News, RT and Oil & Gas Investor Magazine. He is a graduate with honors from the University of Chicago in economics.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Important Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC or CSA filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises may buy or sell shares without any further notice.

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