World’s oil supply cushion could be stretched to the limit due to prolonged outages, which will support prices and threaten demand growth, the International Energy Agency said on Thursday.
Oil prices increased to their highest since 2014 in recent weeks following an expected drop in Iranian crude exports this year due to renewed US sanctions, along with a decline in Venezuela’s production and outages in Libya, Canada and the North Sea.
Organization of the Petroleum Exporting Countries (OPEC) and other key producers including Russia responded to the tightness by easing a supply-cut agreement. Saudi Arabia also vowed to support the market.
In its monthly Oil Markets Report, IEA said that there were already “very welcome” signs that output from leading producers had been boosted and may reach a record. However, the organization indicated that disruptions underscored the pressure on global supplies as the world’s spare production capacity cushion “might be stretched to the limit”.
Spare capacity refers to a producer’s ability to ramp up production in a relatively short time with much of it located in the Middle East.
IEA said OPEC crude production in June reached a four-month high of 31.87 million barrels per day (bpd). Spare capacity in the Middle East in July was 1.6 million bpd, roughly 2 percent of global output.
IEA maintained its 2018 oil demand growth forecast at 1.4 million bpd, but warned that higher prices could dampen consumption.
“Higher prices are prolonging the fears of consumers everywhere that their economies will be damaged. In turn, this could have a marked impact on oil demand growth,” said the report.
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 international sanctions. Iran exports roughly 2.5 million bpd, most of which goes to Asia.
China and India, the world’s second and third largest oil consumers, could face “major challenges” in finding alternative crude oil following the drop in Iranian and Venezuelan exports, indicated IEA.
Iranian crude exports to Europe dropped by nearly 50 percent in June, the report mentioned, as refiners gradually wind down purchases before US sanctions take effect in November.
Meanwhile, OPEC President Suhail al-Mazrouei said on Wednesday that volatility in the crude market was undesirable and OPEC prefers a more stable price environment.
When Libya reopened key oil exporting ports on Wednesday, global oil prices fell sharply, with benchmark Brent futures plunging 6.92 percent, the steepest one-day drop in two years.
Speaking to Reuters on the sidelines of a Canada-United Arab Emirates Business Council event in Calgary, Mazrouei asserted: “Fluctuation is not good and we do not like to see lots of fluctuation in the prices.”
The fluctuations will continue as long as there is no long-term plan for production, warned Mazrouei.
“OPEC and non-OPEC are working on this long-term plan for market stability,” he said. While the group cannot order countries to invest to increase production, the OPEC president said his presence in Canada was aimed at boosting investment in oil exploration and production.
“I am confident that we have enough spare capacity to meet the target that OPEC and non-OPEC have taken,” he concluded.
