One key barometer of potential turbulence in oil markets is Opec's spare crude oil production capacity. As with hurricanes, low readings point to stormy weather ahead. But Opec spare capacity is on the rise, suggesting at least a lull in the price squalls that have beset the market over the past few years. There are still serious issues surrounding the measurement and adequacy of spare capacity -- the degree of geopolitical risk and the location and quality of the available Opec spare, along with the levels of global commercial and strategic stocks, continue to interact in a complicated dance. But a few trends seem to be firmly in place. Firstly, Opec production cuts over the last year have created a 1 million-1.5 million barrel per day cushion of current spare capacity -- with, importantly, a large component of lighter crudes. Secondly, growth in the "other liquids" category, for both Opec and non-Opec, is compensating for slowing non-Opec growth. And lastly, new Opec light crude production is being brought on stream to bolster spare capacity even further.

The call on Opec crude next year is projected by PIW sister publication Oil Market Intelligence to be 29.4 million barrels per day, down from a 30.1 million b/d average expected for 2007. Current Opec spare capacity is rated by OMI at nearly 4.4 million b/d at end-July, excluding Iraq and Angola, which are not included in the production cut system (PIW Aug.20,p2). By year end, reliable spare capacity, excluding those Nigerian volumes shut in due to civil unrest and sabotage, could grow to over 4.5 million b/d with the completion of Saudi Arabia's three-field Greater Khursaniyah Area (GKA) project along its northeast coast (PIW Aug.13,p5). Besides the 500,000 b/d addition to Arab Light crude capacity, the kingdom will also gain a combined 600,000 b/d of natural gas liquids (NGLs) capacity from both GKA and an expansion of the giant Ghawar field's Hawiyah liquids processing center. Smaller contributions are slated to come from Qatar -- 80,000 b/d of condensate and NGLs from the fifth RasGas LNG train and 65,000 b/d of additional capacity from the Idd al-Sharqi field -- and Libya, from a 40,000 b/d capacity expansion at the Al-Jurf field. Although spare capacity is expected to climb above 5 million b/d during 2008, it will still be well below the 7 million b/d peak seen in early 2002, and will decline again after the end of next year.

Although almost all new Opec capacity between now and 2010 is light oil -- primarily from Saudi Arabia, the UAE, Qatar and Africa, with some medium grades from Angola -- decline rates are also concentrated in light oil fields for both Opec and non-Opec. In addition, new non-Opec capacity is skewed toward heavier grades, as the lighter oil was developed and produced first. The quality of Opec spare capacity clearly matters, as was seen at the end of 2004, when Saudi Arabia had to dip into its heavy offshore Safaniyah and Manifa fields to meet rapidly growing Asian demand. Sweet-sour differentials ballooned as a result -- the Brent-Dubai spread went from less than $1 per barrel in March to nearly $13 in October. The Saudis appear to be much more careful this time, not only by building a larger spare capacity cushion between now and 2010, but also by organizing capacity expansions so that the next round of Manifa development is offset with new volumes of Arab Light grade Khurais.

Opec Spare Crude Capacity

Source: Oil Market Intelligence.