Supply cuts could stretch oil market to the limits, warns IEA
13 July 2018
Prolonged supply disruptions, caused by an expected drop in Iranian crude exports due to renewed US sanctions, a decline in Venezuela's production and outages in Libya, Canada and the North Sea, could stretch the world's crude oil market to the limits, the International Energy Agency (IEA) has warned.
This, according to the IEA, could support already high prices and threaten demand growth. Crude oil prices have already hit their highest since 2014 in recent weeks.
OPEC and other key producers, including Russia have responded to the tightness by easing a supply-cut agreement, with Saudi Arabia vowing to support the market as US President Donald Trump accused the group of pushing prices higher.
India, the third-biggest oil consumer, too has warned the Opec that it will have to look for ways to limit consumption and demand if crude prices remain unregulated.
The Paris-based IEA said in its monthly Oil Markets Report that there were already "very welcome" signs that output from leading producers had been boosted and may reach a record.
The global energy watchdog, however, said the 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. Much of it is located in the Middle East.
The IEA said Opec crude production in June reached a four-month high of 31.87 million barrels per day. Spare capacity in the Middle East in July was 1.6 million bpd, roughly 2 per cent of global output.
With US sanctions on Iran taking effect, Saudi Arabia could further ramp up output towards the year-end, which would cut the kingdom's spare capacity to an unprecedented level below 1 million bpd, the IEA said.
Non-Opec production, including from US shale, also continued to rise, but the IEA said that might not be enough to assuage concerns.
"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 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."
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, the IEA said.
Iranian crude exports to Europe dropped by nearly 50 percent in June, the IEA said, as refiners gradually wind down purchases before U.S. sanctions take effect in November.