The International Energy Agency warned on Thursday that spare oil production capacity risks being “stretched to the limit” as supply disruptions and US sanctions against Iran tighten the market. The Paris-based agency said that while there were signs stronger oil prices may start to weigh on demand growth, for the moment the key risk was supply capacity, with moves by producers to raise output cutting into the thin buffer of reserve production. “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 IEA said in its monthly report.

“This vulnerability currently underpins oil prices and seems likely to continue doing so. We see no sign of higher production from elsewhere that might ease fears of market tightness,” it said. The IEA’s comments come as a host of outages, from Venezuela to Libya, have tightened markets and boosted oil prices as high as $80 a barrel in recent weeks. That has led Saudi Arabia and other countries to boost output to make up the shortfall, partly under pressure from the US and other big oil consumers.

Oil prices tumbled on Wednesday, posting the biggest one-day fall in two years, with Libya’s export situation improving and fears of the impact of a trade war between the US and China growing. But traders still see big risks. Brent crude stabilised on Thursday, rising 1.5 per cent to near $75 a barrel. The IEA said it saw only 2.1m barrels a day of quickly available spare capacity in three Opec members — Saudi Arabia, Kuwait and UAE.

If Saudi Arabia boosts output towards record levels near 11m barrels per day this summer, as it has indicated, it would cut the kingdom’s spare capacity to “unprecedented” levels, the IEA said. “[In the fourth quarter] US sanctions on Iran are expected to hit hard and Venezuelan capacity may spiral lower, the IEA said. “To help compensate for the further unplanned declines and limit stock draws, Saudi Arabia could ramp up even more which would cut its spare capacity to an unprecedented level below 1m barrels per day.”

Posted in: IEA