The world’s excess supply of oil may be “stretched to the limit” as Middle East countries and Russia boost production to offset a confluence of output disruptions from major producers.
The International Energy Agency, in its monthly oil market report released Thursday, welcomed the recent deal by OPEC and Russia to increase oil production by a collective 1 million barrels per day to stem rising prices and offset lost barrels in Iran and Venezuela.
But it warned that the planned production increase “comes at the expense of the world’s spare capacity cushion, which might be stretched to the limit.”
“This vulnerability currently underpins oil prices and seems likely to continue doing so,” the IEA said.
Spare capacity is idle production that can be brought online within 90 days.
Until the new OPEC agreement to boost production took effect this month, the oil cartel for the last 18 months had worked with Russia to cut crude production to boost prices that had fallen to below $30 in 2016.
But prices have rallied even more than OPEC expected in recent months, approaching $80 per barrel, as some countries restricted production more than the amount targeted under the agreement, and other unintended supply disruptions have arisen.
Saudi Arabia, OPEC’s largest producer, is doing its best to respond, increasing production by 430,000 barrels a day in June — before the new deal came into effect — the IEA said. But OPEC doesn’t have that much excess supply, and its spare capacity could be challenged because of immediate new output.
Saudi Arabia’s extra capacity makes up nearly half of OPEC’s spare output. Its spare capacity fell by 440,000 barrels a day to 1.58 million barrels a day, the IEA said.
“There are already indications from leading producers, particularly Saudi Arabia, its Gulf allies, and Russia, that production is climbing and may reach record levels,” the IEA said. “That prices have remained relatively high reflects various supply concerns, some of which will be with us for some time to come, e.g. Iran and Venezuela, and others that are probably shorter term.”
Venezuela, a major producer which is suffering from a political and financial crisis, saw production plummet in June to a new 30-year low. And fighting among various armed factions in Libya has cut production in half. These disruptions are depressing world production by a combined 1.3 million missing barrels per day, a figure that is expected to grow in coming months.
Looming over all that is the potential for lost production from Iran due to sanctions. The U.S. has signaled it wants to reduce Iran’s oil exports to zero and sanction countries that buy crude from Tehran, after leaving the nuclear deal with that country. But Iran is OPEC’s third largest producer, selling around 2.4 million barrels a day, or more than 2 percent of global supplies, since the lifting of sanctions in 2016.
The IEA Thursday predicted that Iran’s oil exports could fall by more than 1.2 million barrels per day, which is the amount Tehran lost during the last round of international sanctions against it.
In June, the IEA said Iran’s crude exports fell by about 230,000 barrels per day, as European purchases dropped by nearly 50 percent. Most of Iran’s oil goes to Asia, and it’s less clear if China and India, the largest importers, will stop buying Tehran’s crude because of U.S. threats to cut buyers off from the American banking system.
“It is clear that the world’s second and third biggest oil consumers could face major challenges in sourcing alternative compatible barrels,” the IEA said of China and India.
The IEA did note some signs of optimism for oil supply, saying disruptions in Alberta, Canada and Brazil could be temporary.
“Some of these supply issues are likely to be resolved, but the large number of disruptions reminds us of the pressure on global oil supply,” the IEA said.
