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Stocks built by 3.3m b/d in second quarter, says IEA

Saudi Arabia is pumping oil at record highs, Iranian supplies are about to hit the market, Iraq’s exports from the south are beating expectations and, across the Atlantic, North American oil production continues to rise

The International Energy Agency thinks stocks were building by 3.3m b/d in the second quarter.

Lurking amid that thicket of bearish news, though, is something the bulls still want to latch on to: dwindling spare capacity. For the oil market, Opec’s reserve of quickly producible oil has always been the first defence against supply disruptions or price spikes. Any drop in the level is a reason to buy.

Sometimes, the market has seemed to value the spare capacity as much as the actual supply.

Take 2008 as an example. As oil prices soared, consumer countries begged Saudi Arabia for more oil. The kingdom obliged – but the market saw the move as bullish. Every extra barrel exported from the kingdom, reasoned analysts, was one taken from its spare capacity. By July 2008, Saudi output of 9.55m b/d left Opec with just 2.3m b/d to call on in case of an emergency, so prices spiked.

Saudi output soared again in June, to a record monthly high of 10.35m b/d. It left Opec’s spare capacity, excluding Iraq, Iran, Libya and Nigeria, at just 2.27m b/d. Some sources close to the ministry expect the kingdom’s production to move higher still, to around 10.5m b/d, which will trim spare capacity again to just over 2m b/d. “Spare capacity is in play,” says one consultant close to the Saudis: to support its market strategy, the kingdom is willing to use everything at its disposal.

Should the market worry? Not really.

Oversupply has left inventories so buoyant, points out Neil Atkinson, head of oil market analysis at Lloyd’s List Intelligence, that any disruption would be countered by oil held in stocks. The IEA says OECD stocks hit a record high of around 2.9bn barrels in May and built by 740,000 b/d in Q2 – more than Qatar, an Opec member, produces. Chinese strategic tanks are full. Singaporean stocks are brimming. Even South Africa’s giant 45m barrels tank farm at Saldanha Bay is now at capacity. It would take a lengthy major supply outage to drain the world’s stored oil.

Tight oil and its high responsiveness to price changes is the other reason to stay calm, argues Jamie Webster, senior director of IHS Energy. Any supply interruption would just lift oil prices and bring tight oil roaring back. Drilled but uncompleted wells would be the first to produce and tight oil, not Saudi Arabia, is now the global swing producer.

In short, the market can safely ignore the Opec spare-capacity numbers for a while – at least until demand growth begins to outpace supply growth. Even then, record-high inventories will need to clear first. At that point, we’ll find out if Texas and North Dakota really can take on Saudi Arabia’s mantle.

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