Falling Oil Capacity Could Pose Problems As OPEC Prepares To Meet

Next week, nearly two years after crude oil prices began to tumble, members of OPEC will discuss the oil market in Vienna.

Next week, nearly two years after crude oil prices began to tumble, members of the Organization of the Petroleum Exporting Countries set to discuss the oil market in Vienna.

When crude prices initially began their decline amid a global oversupply of oil, OPEC kept production high in hopes that low prices would drive out high-cost drilling operations in North America and elsewhere.

The cartel — led by Saudi Arabia and its Persian Gulf allies — maintained output levels late last year despite resiliency in North America and devastating budget effects among its own members from lower oil revenues.

Now, The Wall Street Journal reports that OPEC will soon see its lowest spare production capacity in eight years just as supply shortages finally begin to elevate the price of oil.

Saudi Arabia accounted for nearly all of OPEC's spare production capacity — or the oil that can be brought online in 30 days and sustained for 90 — but the country reduced its oil investments as prices dwindled.

Analysts warned that if oil reserves stashed away in recent months run out, Saudi Arabia would not have the ability to quickly ramp up oil production.

Oil reserves helped minimize the impact of recent shortages caused by a variety of factors, from labor strife in Kuwait to violence in Nigeria to wildfires in Canada, but future shortages could result in a price spike.

“Inventories may seem high now, but if we get an outage somewhere of 1 million barrels a day for a period of three months, that’s 90 million barrels gone,” Yasser Elguindi of Medley Global Advisers told the Journal.

The warnings come after a February forecast from the International Energy Agency suggested that falling global oil investments "raise the odds of unpleasant oil security surprises in the not-too-distant future."

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