Oil Vulnerable as OPEC Supply Cushion Thins

TEHRAN (FNA)- Rising OPEC output has cut the group’s spare capacity and left the oil market vulnerable to any surprise supply disruptions, Iran’s OPEC governor said on Sunday.

The Organization of the Petroleum Exporting Countries (OPEC) pumped more oil for the third consecutive month in July, helping to bring prices down $30 from a peak above $147 a barrel to a three-month low on Friday.

Rising OPEC output has coincided with a fall in demand from top energy consumer the United States, hit by an ailing economy and soaring pump prices.

“The drop in oil price has come at the expense of supply security,” Iran’s OPEC Governor Mohammad Ali Khatibi told Reuters by telephone.

Consuming countries benefiting from the price fall should be aware that it could easily be reversed by any surprise supply outages, he said.

“The drop in prices works in favor of consumers,” Khatibi said. “But on the other hand, any drop in market security in the form of spare capacity is highly detrimental to consumers. We need excess capacity to guarantee supply security.”

OPEC, source of over a third of the world’s oil, had around 1.5 million barrels per day (bpd) of spare capacity to meet any disruptions, he said.

The dispute between Iran and the West over Tehran’s nuclear program has been the main focus of supply concern in oil markets as investors fear any conflict could threaten Iran’s around 2.5 million bpd of exports. Iran is the world’s fourth-largest exporter.

OPEC’s Secretary General Abdullah al-Badri said in July it would be impossible to replace Iran’s oil output in the case of disruption due to an attack.

Top oil exporter Saudi Arabia is the holder of most of the world’s spare capacity. The kingdom pumped at the fastest rate for 27 years in July, boosting production without making any formal agreement with other OPEC members to boost the group’s supply target.

Saudi output hit 9.7 million barrels per day (bpd), while its capacity stood at 11.3 million bpd.

Saudi Arabia has a long-held policy of keeping between 1.5 million bpd and 2 million bpd as a supply cushion.

Record fuel prices sparked protests worldwide this year and led to pressure from consuming countries on producers to boost output.

OPEC blamed factors beyond its control such as international political tension, including the US and Israeli threats of military action against Iran and West’s sanctions against Tehran over its nuclear issue accompanied by the weakness in the US dollar and investment flows into commodities for the run up in oil prices.

Analysts view US-led sanctions against Iran and geopolitical factors as among the main causes of recent hike in oil prices, saying that fears of a new Middle East conflict are behind the new high for oil prices.

Market analysts, specially those from consumer nations, take Bush administration responsible for the price hikes during the last year, saying that these are frequent sanctions and the “rumors of US and Israeli action against Iran circulating in the markets” that affected oil and the dollar.

Softening rhetoric in the dispute last month contributed to oil’s slide.

Those factors have eased and returned the fundamentals of supply and demand to the fore, Khatibi said last week.

“The dollar, speculation, geopolitics – their influence has decreased,” he said. “The role of fundamentals is stronger than the role of non-fundamental factors.”

Khatibi also said that the oil market was oversupplied by around 1.3 million bpd.