World's oil cushion could be stretched to the limit, IEA warns

Irving Hamilton
July 13, 2018

The International Energy Agency (IEA) said that the world's spare capacity to produce oil, which normally serves to cushion supply disruptions, could be stretched to the limit as big producers increased their output.

"This vulnerability now underpins oil prices and seems likely to continue doing so", the IEA added.

OPEC and other key producers including Russian Federation responded to the tightness by easing a supply-cut agreement, with Saudi Arabia vowing to support the market as U.S. President Donald Trump accused the group of pushing prices higher.

"Higher prices are prolonging the fears of consumers everywhere that their economies will be damaged". " on Thursday. "I think it may increase 1.5% per year over the next several years ... that's 1.5 million barrels per day and the decline rate of so many OPEC countries means that the Saudi's are really going to try to hold it together for OPEC but they are not going to be able to".

The IEA said Iran's crude exports could be reduced by significantly more than the 1.2 million bpd seen in the previous round of global sanctions. Iran has already seen its shipments to Europe fall nearly 50 per cent as US penalties deter buyers, and the country's total exports could slump even more, according to the agency, which advises most of the world's major economies.

The IEA welcomed in its July report last month's agreement between the Organization of the Petroleum Exporting Countries (OPEC) and Russian Federation to open the taps in order to bring prices down from multi-year highs.

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"Saudi Arabia's sharp increase allowed it to overtake the U.S. and reclaim its position as the world's second largest crude producer, and if it carries out its intention to produce at a record rate near 11 million barrels per day this month, it will challenge Russian Federation", it added.

Spare capacity refers to a producer's ability to ramp up production in a relatively short time. That would leave barely 1 per cent of global supply to compensate for any additional outages.

It also highlighted continuing unrest in Venezuela and a drop in Iranian exports after President Donald Trump announced he was pulling the United States out of the landmark nuclear deal reached in 2015.

As U.S. sanctions on Iran are expected to "hit hard" in the fourth quarter of the year, Saudi Arabia could further ramp up output, which would cut the kingdom's spare capacity to an unprecedented level below 1 million bpd, the IEA said. Fuel costs have sparked protests in Brazil and Russian Federation, and complaints from India.

The IEA report was published a day after both main oil contracts were sent into freefall by worries over a stronger dollar and the impact of the global trade war on demand. However, the agency kept its annual consumption growth forecasts for this year and next unchanged.

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