The US and OPEC appear to be talking past each other when it comes to the producer bloc's spare output capacity.
The two sides don't agree on the definition of the term, let alone how much spare capacity OPEC even has available.
The public spat has heightened fears in the market of whether OPEC is willing - or able - to fill the supply gap anticipated from US sanctions on Iran and Venezuela's ongoing crisis, causing oil prices to spike to four-year highs in recent days. Even if OPEC were to pump as max volume, as US President Donald Trump has urged, it would not be able to respond to any future disruptions, raising the risk of an even more dramatic surge in prices.
"I think we have a big risk premium coming in that we're going to run out of spare capacity amidst considerable geopolitical disruption risk," said Bob McNally, a veteran OPEC watcher who heads the consultancy Rapidan Energy Group, during an Atlantic Council event Thursday. "When we get this tight, the market wants to be assured that you've got cash in the bank, if you will."
On Wednesday, the US State Department accused OPEC of contributing to high oil prices by holding back 1.42 million b/d of spare capacity from the world market.
A week earlier, while laying out his argument against a release from the US Strategic Petroleum Reserve, Energy Secretary Rick Perry said there was still spare capacity available throughout the world, including new oil output in the Neutral Zone between Saudi Arabia and Kuwait.
President Trump, and his senior administration officials, spent much of the ongoing oil price rally arguing that OPEC, particularly Saudi Arabia, has the spare capacity to exceed global demand and reduce oil prices.
"The United States continues to engage with OPEC countries and we encourage them to utilize their spare capacity to ensure world oil supply meets the demand," the State Department said through a spokesperson.
The statement puzzled some veteran oil analysts. Maxing out global spare capacity would surely heat up prices, not cool them off, as a single supply disruption anywhere in the world could trigger a price spike.
"I wouldn't want to be drawing attention to spare capacity at all," said one analyst who asked not to be named. "That's the exact opposite message we want to be sending when prices are at $86/b."
A suggestion to push spare capacity to zero "would heighten market anxiety and likely push up prices, even without any further supply disruptions," Matthew Reed of Foreign Reports wrote in a note Friday.
But the Trump administration's argument against OPEC is also complicated by doubts over how much spare capacity OPEC holds and by the very definition of spare capacity.
The US Energy Information Administration, which estimates OPEC's current spare capacity is about 1.42 million b/d, defines spare capacity as "the volume of production that can be brought on within 30 days and sustained for at least 90 days."
But Saudi Arabia and the International Energy Agency have a looser definition, often counting production that may not be brought on for as long as 90 days.
The IEA estimates Saudi spare capacity at 1.62 million b/d and total production capacity at 12.04 million b/d.
This can lead to confusion, such as Secretary Perry depicting potential Neutral Zone output as spare capacity.
"If it's not available to the market because of a dispute between Saudi Arabia and Kuwait, then it might as well be on Pluto," McNally said. "It is not spare capacity."
Much of the criticism from Trump was caused by Saudi claims that they can produce so much above their current output of about 10.4 million b/d, which has drawn suspicion from the market.
"That's the Saudi's own fault for holding out that they hold that much spare capacity," said David Goldwyn, president of Goldwyn Global Strategies and a former special envoy and coordinator for international energy affairs at the State Department. "If they didn't, they shouldn't have overhyped their capabilities."
In Algiers last month, Saudi energy minister Khalid al-Falih said Saudi Aramco is able to produce 12 million b/d at will. Once negotiations with Kuwait are complete, fields in the Neutral Zone shared by the two countries could add another 500,000 b/d, he said.
The UAE claims some 500,000 b/d of spare capacity, while Kuwait claims it has about 100,000 b/d
Goldwyn said that the Trump's criticism of OPEC and his demands of Saudi Arabia are unprecedented in American history. The war of words is also "deeply ironic," Goldwyn said since US and Saudi relations have not been this close in roughly 70 years.
"The US is doing, pretty much, everything Saudi Arabia could want to both helps its politics and hand it Iran's market share," he said during Thursday's Atlantic Council event.
