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How OPEC’s Spare Crude Oil Production Capacity Impacts the Market

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OPEC’s spare crude oil production capacity  

The EIA (U.S. Energy Information Administration) estimates that OPEC’s (Organization of the Petroleum Exporting Countries) spare crude oil production capacity rose 30,000 bpd (barrels per day) to 1.0 MMbpd (million barrels per day) in October 2016 compared to the previous month.

OPECs spare crude oil production capacity rose 3.0% month-over-month, but fell 28.3% year-over-year.

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OPEC’s spare crude oil production capacity: Highs and lows 

OPEC’s spare production capacity hit 4.4 MMbpd in September 2009, the highest in the last ten years. Brent crude oil prices were trading at $67.60 per barrel in September 2009.

OPEC’s spare production capacity hit 910,735 bpd in September 2005, the lowest in the last ten years. Brent crude oil prices were trading at $62.90 per barrel in September 2005.

Impact of OPEC’s spare crude oil production capacity on crude oil prices 

Brent and WTI crude oil prices rose from 2005–2008 when OPEC’s spare crude oil production capacity levels were low. Lower spare capacity restricts OPEC’s ability to respond to a rise in demand. Consequently, crude oil prices rise. On the other hand, high OPEC spare crude oil production capacity indicates ample headroom to manage demand and, consequently, prices.

OPEC’s production capacity is expected to average 1.3 MMbpd (million barrels per day) in 2016. It’s expected to average 1.2 MMbpd in 2017. The consensus of falling production capacity suggests a rise in OPEC crude oil production.

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Impact on crude oil producers  

Expectations of a rise in crude oil production from OPEC will have a negative impact on crude oil prices in the currently oversupplied market. Lower crude oil prices have a negative impact on major Middle East oil producers such as Iraq National Oil Company, Saudi Aramco, National Iranian Oil Company, and Oman Oil Company. They also impact US oil and gas exploration and production companies such as Chevron (CVX), Warren Resources (WRES), Sanchez Energy (SN), ConocoPhillips (COP), and Bonanza Creek Energy (BCEI).

Moves in crude oil prices impact ETFs and ETNs such as the VelocityShares 3X Inverse Crude Oil ETN (DWTI), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), the Vanguard Energy ETF (VDE), the PowerShares DWA Energy Momentum ETF (PXI), the ProShares Ultra Bloomberg Crude Oil (UCO), the First Trust Energy AlphaDEX ETF (FXN), and the Direxion Daily Energy Bear 3X ETF (ERY).

Next, we’ll analyze Saudi Arabia’s crude oil production strategy for the OPEC meeting.

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