Possible rise in crude output threatens historic squeeze on oil buffer

 
Sebastian McCarthy
Opec, Russia and other oil producers will be meeting next week to discuss the proposed rise in crude output
Opec, Russia and other oil producers will be meeting next week to discuss the proposed rise in crude output (Source: Getty)

Fears of a price hike in the oil industry loom large as a potential rise in crude output next week poses a threat to the global oil buffer.

Industry experts worry that the demand for spare production capacity, which is the extra oil that states can sustain at short notice in the case of natural disasters, conflicts or unplanned events, will slump following a possible increase in crude production.

If the Organisation of the Petroleum Exporting Countries (Opec), Russia and other producers do decide to raise output when they meet on 22 June, then it could spell a possible price rise if the oil supply is disrupted, as there would be less of an emergency cushion.

Read more: Venezuelan crude exports faced with 24m barrel backlog

Speculation that the buffer could decline from three per cent to two per cent of global demand would bring the spare production capacity down to levels not seen since 1984.

Jason Gammel, an analyst at Jeffries, said: “If there are any further supply interruptions then there would be very little that the markets could do. If, for example, the crisis in Libya heated up again then the ability on the supply side to do anything would be very limited.”

He added: “It is going to be more likely that the markets will now have to price in political factors.”

Read more: Oil prices slide as US and Russia boost production ahead of Opec meeting

Back in January Claudio Descalzi, the chief executive of exploration firm Eni, said: “Today we no longer have an inventory cushion or a large spare capacity."

He continued: "In this context, any geopolitical event can create a price spike."

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