[Peakoil] Analysis: If Saudi hikes, OPEC spare capacity to be in focus | Reuters

[Antony Barry]

By David Sheppard

NEW YORK | Thu Jun 9, 2011 1:03am EDT

NEW YORK (Reuters) - Saudi Arabia must perform a high-stakes tightrope act in the second half of this year: pump just enough extra oil to meet a seasonal rise in demand, but not so much that it calls attention to a thinning cushion of spare capacity.

Following an extraordinary failure of the Organization of the Petroleum Exporting Countries to agree to raise output, the world will now rely on Saudi Arabia to meet a more than 2 million barrels per day (bpd) rise in oil demand between the low-demand second quarter and the peak summer third quarter.

The kingdom has thus far managed to bear the strain of filling a gap left by Libya, but with raging civil war likely to keep Libya's oil wells idle for months longer, the world's top exporter will be put to the test in the next few months.

The result should be more than enough crude for the world's refiners, provided Saudi Arabian oil minister Ali al-Naimi keeps his pledge to pump more oil regardless of the acrimonious end to a meeting he described as the "worst ever".

But as a result, OPEC as a whole will draw down its "spare capacity" -- the cushion of excess supply that it can ramp up at short notice to meet supply gaps or demand spikes -- to the lowest since 2008, when oil surged to almost $150 a barrel.

That dwindling reserve, which stood at a hefty 5-6 million bpd at the start of 2011, threatens to leave the market at risk of further price spikes regardless of how well it is supplied. Without the return of Libya, spare capacity could fall to just 3 million bpd by year's end.

It may fall to as low as 2 million bpd by 2012, likely forcing traders to factor a greater "fear premium" into prices. At less than 2.5 percent of global demand, that cushion is razor-thin by historical standards.

JP Morgan's head of energy research, Lawrence Eagles, said it highlighted that OPEC had been surprised by the strength of demand, which is up by around 5 percent since the depths of the recession in 2009.

"What this decision brings back to the fore is the fact that spare capacity is not what has been portrayed by OPEC, and that there are few member countries to increase output," Eagles said.

"Under these circumstances, it's going to require every OPEC member to produce at its maximum in the next few months to ensure that the oil market is well supplied. And the end result will be seen as a barometer of true capacity levels."

THE NUMBERS AND THE DAMAGE DONE

The loss of over 1 million bpd of Libyan crude and an output increase of 1.5 million bpd will reduce spare capacity to around 3 million bpd, while the call on OPEC crude -- the anticipated demand for OPEC oil assuming no change in inventories -- is expected to increase again in 2012.

Early forecasts from the U.S. Energy Information Administration and other analysts suggest it will rise by at least 1 million bpd.

The immediate need is even more pressing, however, as global demand typically peaks in the third quarter, when U.S. drivers take to the roads and Middle Eastern countries consume more crude to fuel power plants. Japan's nuclear disaster has also added additional demand to the balance sheet.

OPEC's forecasts last month call for a nearly 2 million bpd increase in demand for its own oil, a figure that remains almost as high in the fourth quarter.

A senior OPEC delegate said on Wednesday Saudi Arabia had produced 9.16 million bpd in May, already more than 1 million barrels above its implied output target from the group.

The country's production capacity is around 12.5 million bpd.

INVESTMENT, EVENTUALLY

Samuel Ciszuk, senior energy analyst at IHS Global Insight, said Saudi Arabia was taking steps to address the possible drop in spare capacity, which risks threatening its role as the world's swing producer, often characterized as the "Central Bank of Oil".

"They are clearly concerned about their spare capacity cushion eroding too quickly given resurgent global (Asian) demand and inability among other OPEC nations to deliver on their expansion plans -- or in Libya's case to potentially deliver at all," Ciszuk said.

"Algeria, Libya, Iran look unlikely to get their 'act together' and deliver promised capacity increases. Kuwait continues to move slowly and Iraq is a massive question mark."

On Monday, Saudi state oil giant Aramco said it was speeding up investment plans, aiming to bring the 900,000-bpd Manifa oilfield to full capacity by 2014, earlier than previously planned.

But analysts said it may now have to go further and jumpstart its plan to increase capacity from around 12.5 million bpd to 15 million bpd that it mothballed during the financial crisis.

Fadel Gheit, senior energy analyst at Oppenheimer, said spare capacity could be "cannibalized" within three years, but he was confident a combination of high prices and technological advances could bring enough production onstream in the next few years to avert a real supply crunch.

"The current price is already telling us that the market is uncomfortable with the outlook for supplies. But I don't think we're going to run out of oil," Gheit said.


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