World oil supply risks being ‘stretched to limit’ — energy watchdog

Already in June the two key producers lifted output by more than 500,000 barrels per day between them, the International Energy Agency said on Thursday. (Reuters)
Updated 12 July 2018
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World oil supply risks being ‘stretched to limit’ — energy watchdog

  • The International Energy Agency pointed to supply disruptions in Libya after a string of attacks on infrastructure
  • Saudi Arabia and Russia opened their taps ahead of a key Vienna meeting in June where OPEC and Moscow agreed to up output in order to bring prices down

PARIS: Rising global oil supply, driven by crude giants Saudi Arabia and Russia, may come under pressure as key producers face disruptions, the International Energy Agency said Thursday.
The IEA welcomed in its July report last month’s agreement between the Organization of the Petroleum Exporting Countries (OPEC) and Russia to open the taps in order to bring prices down from multi-year highs.
But it pointed to supply disruptions in Libya after a string of attacks on infrastructure.
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.
“The large number of disruptions reminds us of the pressure on global oil supply,” the IEA said.
“This will become an even bigger issue as 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 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.
The selling was also fanned by Libya’s resumption Wednesday of oil exports from its eastern production heartland after a showdown between the war-torn country’s rival authorities.
Even though Libyan exports have resumed, the IEA remains worried for the future.
“At the time of writing, the situation seemed to be improving, but we cannot know if stability will return,” it said.
“The fact that so much production is vulnerable is clearly a cause for concern.”
Also worrisome was the unabating unrest in Venezuela, which has sent output from the Latin American oil giant crashing in recent weeks.
And while Iran has yet to feel the full impact of renewed US sanctions, the IEA fears there could be “an even steeper reduction than the 1.2 million barrels per day seen during the previous round of sanctions.”
Iraq, which is also chronically restive, does not have spare capacity either, leaving most of the job of hiking OPEC production to Saudi Arabia, the United Arab Emirates and Kuwait.
“We see no sign of higher production from elsewhere that might ease fears of market tightness,” the IEA said.
Saudi Arabia and Russia opened their taps ahead of a key Vienna meeting in June where OPEC and Moscow agreed to up output in order to bring prices down.
“Already in June the two key producers lifted output by more than 500,000 barrels per day between them,” the IEA said.
“Saudi Arabia’s sharp increase allowed it to overtake the US 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 Russia,” it added.
But they alone cannot carry the burden of keeping the oil market stable.
“Despite higher output in June, OPEC oil supply was down 700,000 barrels per day compared to a year ago, with Venezuela lower by nearly 800,000 barrels per day, Angola by 210,000 barrels per day and Libya by 130,000 barrels per day,” the IEA said.
“Even so, global oil output was 1.25 million barrels per day higher than a year ago as rampant US output underpinned healthy non-OPEC growth.”


Iran looms large over OPEC summit

Updated 22 September 2018
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Iran looms large over OPEC summit

  • Saudi Arabia only country in Mideast, and perhaps world, with enough capacity to keep market supplied, say experts
  • At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies

LONDON: The Opec summit in Algiers on Sunday meets amid widespread fears of a supply crunch when a forecast 1.4 million barrels a day of crude is lost from Iran in November when US sanctions kick in.
If, on top of that, more supply shocks hit the market in worse-than-expected disruption from Libya and Iraq, the price of crude could surge, said Andy Critchlow, head of energy news at S&P Global Platts. “At the moment, the market looks finely balanced,” he said.
There isn’t a lot of slack in the system. As Critchlow points out: “Upstream investment in infrastructure and new wells is historically low and it will take a long time to turn that around.”
At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies. The gathering comes after a tweet by President Trump on Sept. 20 calling on Opec to lower prices. He said on Twitter that “they would not be safe for very long without us, and yet they continue to push for a higher and higher oil price.”
Critchlow reckoned KSA still had spare capacity of about 2 million bpd. And KSA would get oil back as they go into winter as it had needed 800,000m bpd merely to generate electricity for the home market to meet heightened demand for air conditioning in the summer.
But there is uncertainty about what will come out of Algiers. For a start, the Iranians say they will not attend. That could be tricky in terms of an Opec communique at the end of the meeting as statements need unanimous support from member nations. And Iran has indicated it will veto any move that would affect Iran’s position, ie, one where other countries absorb its market share as sanctions bite.
Jason Gammel, energy analyst at London broker Jefferies, said: “The magnitude of the drop in Iranian exports is likely to be higher than any hit in demand as a result of problems linked to emerging market currencies, or trade wars. That’s why we expect oil prices to continue to strengthen. The Saudis and their partners will keep the market well supplied, and I think the issue is that the level of spare capacity in the system will be extremely low. Any threat or interruption will mean price spikes. Possibly by the end of the year demand will exceed supply; for now, the market remains in balance, but threats of supply disruption will bring volatility.”
Under the spotlight in Algiers is a production cuts accord forged by Opec and 11 other countries in 2016 which has been extended to the end of this year. The agreement helped reboot prices and obliterate inventory stockpiles that led to the crash in crude prices nearly three years ago. But how long will the agreement last? Algiers may kick that one into the long grass.
Thomson Reuters analysts Ehsan Ul-Haq and Tom Kenison told Arab News: “OPEC members would like to maintain cohesion within the group around supply ahead of Iran sanctions and declining Venezuela production, However, they are expected be in favor of maintaining stability in prices while doing so. On the other hand, they need to find a consensus around how their market share would be affected by a decision to pump more oil in the market. Any decision around production will likely be offset until the November meeting.”
Critchlow said that it is what KSA and Russia say and do that matters. “They speak for a fifth of the global oil market, producing a combined total of 22m bpd.” Together, they are the swing producers when it comes to crude production and supply.
Another factor about Algiers is that it is a meeting of the Joint Ministerial Monitoring Committee, which is not a policy-making forum. Big policy statements may have to wait for the main Opec summit in Vienna at the end of year. That said, there will be some very high-level delegations in Algiers, including the Saudi oil minister and his Russian counterpart.
A statement about the demand picture could emerge, especially as there are fears about the impact on the global economy from the US-China tariff war.
Looking to the future, Critchlow thought the Opec production cuts accord would carry on into 2019. “Oil priced between $70/bbl and $80/bbl is a sweet spot for Middle East producers. Its’s good for Saudi as it helps stop further drainage of their foreign reserves and moves the budget back toward balance. Do they want (the price) to go higher? I think that would cause a lot of political problems for them.”