Relationship between spare crude oil supply capacity and prices

- "Crude oil prices continue to consolidate in a lateral range. We largely attribute their range-bound action to an uncertain economic outlook. Another factor militating against an upside breakout of their trading range is the existence of ample supply capacity globally. If the global economy weakens, crude oil prices would likely gain downside momentum. Conversely, if crude oil demand grows as projected by the IEA amid favorable economic conditions, upward pressure on crude oil prices would presumably begin to intensify. Spare crude oil supply capacity is currently equivalent to 6.4% of demand, a historically price-suppressive level. However, curtailment of petroleum resource development during the 2008–09 economic downturn bodes unfavorably for growth in production capacity through 2012. If demand grows in line with the IEA's forecast without any offsetting growth in production capacity, we estimate that spare supply capacity will fall to 4–5% of demand. Historically, when this ratio of spare supply capacity to demand has fallen below 5%, crude oil prices have risen steadily, fueled by concerns about supply constraints. Spare supply capacity bears close watching in terms of the outlook for crude oil prices."

Nomura Oil Commodities Monthly Sep2010

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