Global oil markets face a high risk of a supply squeeze this year as demand remains resilient and spare production capacity dwindles, the new head of OPEC said.

Fears over slowing consumption in China and the wider world -- which have pushed crude prices 16% lower this month -- have been exaggerated, OPEC Secretary-General Haitham Al-Ghais said in an interview with Bloomberg Television. 

At the same time, producers in the Organization of Petroleum Exporting Countries and beyond are running out of extra supplies they can bring to market, Al-Ghais said at OPEC’s Vienna headquarters. The Kuwaiti oil executive was appointed as the group’s top diplomat this month.

“We are running on thin ice, if I may use that term, because spare capacity is becoming scarce,” Al-Ghais said. “The likelihood of a squeeze is there.”

International oil prices have retreated to near $90 a barrel amid signs of a slowing economy in China -- where fuel use slumped to a two-year low in July -- and a lackluster holiday driving season in the US. Still, the OPEC chief remains confident that world oil demand will increase by almost 3 million barrels a day this year, bolstered by China’s return from Covid-related lockdowns.

“China is still a source of phenomenal growth,” he said. “We haven’t seen China open up exactly -- there’s a strict Covid Zero policy -- I think that will have an impact when China gets back to full steam.”

Al-Ghais’ decades of experience at Kuwait Petroleum Corp. included opening the company’s first Beijing office in 2005.

Token Hike

The OPEC+ alliance surprised traders earlier this month by agreeing on a token production increase of just 100,000 barrels a day, despite calls for extra supplies by US President Joe Biden, who made a landmark trip to group leader Saudi Arabia in July. 

The 23-nation group, an amalgam of OPEC nations and non-members, explained that it had to ration its “severely limited” reserves of output with “great caution.” OPEC and its partners hold idle capacity of roughly 2 million to 3 million barrels a day, or about 3% of world output, Al-Ghais said.

The crunch has arisen from years of underinvestment in the global oil industry, both in developing new supplies and building the refineries and other infrastructure to process them, he said. 

“Chronic underinvestment for several years is really what’s taken us to where we are today,” he said.

World markets may also face strain as European Union sanctions on OPEC+ member Russia over its invasion of Ukraine come into effect in December. Despite the political turmoil, the group has shown it’s keen to preserve ties with Moscow, which Al-Ghais considers to have played a “critical role” in the stability of global markets.

Iran Supply

Oil’s losses deepened this week on signs that OPEC member Iran is close to reviving a nuclear accord that could ease US sanctions on its oil trade. Tehran could add about 1.3 million barrels a day within six months of an agreement, according to the International Energy Agency. 

Still, global demand remains healthy enough to absorb any additional flows from the Islamic Republic, provided they are released in a responsible and gradual fashion, according to the OPEC chief.

With so much uncertainty, it’s too early to say what the OPEC+ coalition will decide when it next meets on Sept. 5, Al-Ghais said. The group, which has gathered online since the start of the Covid-19 pandemic in early 2020, aims to have an in-person gathering in Vienna in December, he said.

“We’ve demonstrated time and time again in the past that we’re willing to do whatever it takes to do what the market really requires,” Al-Ghais said.