IEA says spare oil capacity risks being ‘stretched to limit’

The International Energy Agency on Thursday said that spare oil production capacity is at the risk of being “stretched to the limit” amid supply disruptions across the world and US sanctions against Iranian oil.

“Rising production from Middle East Gulf countries and Russia, welcome though it is, comes at the expense of the world’s spare capacity cushion, which might be stretched to the limit,” the Paris-based agency said in its latest monthly oil report.

“This vulnerability currently underpins oil prices and seems likely to continue doing so,” it added.

In June, global oil supply rose by 370,000 barrels per day (bpd) driven by increases in Saudi Arabian and Russian output, the report said.

The hike came after OPEC and its non-member allies agreed in June to lower compliance level to the 2016 production-cut deal to 100 percent from more than 150 percent.

“OPEC crude production in June reached a four-month high of 31.87 million bpd. A surge from Saudi Arabia offset losses in Angola, Libya, and Venezuela,” IEA said.

While countries like Saudi Arabia, Russia, Kuwait and the UAE have the spare capacity to replace barrels lost from disruptions in Venezuela, Iran and Libya, increasing output to maximum means reduced headroom to maneuver in order to counter any future unplanned outages, Ehsan Khoman, head of research and MENA strategist at MUFG, told Argaam.

For oil traders, shrinking spare capacity implies risk.

On Thursday, oil prices edged higher, recovering from yesterday’s slide. Brent crude was last trading up 2.1 percent at $74.92 per barrel.

Meanwhile, IEA kept its forecast on oil demand growth unchanged for this year and the next at 1.4 million bpd.

“In H1 2018, (demand) growth will average 1.5 million bpd, falling to 1.3 million bpd in the second half of the year,” it added.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com