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OPEC+ just starting new 1.7 million b/d output cut deal

Rising oil prices may prompt some compliance slippage

Platts Analytics estimates 2.3 million b/d global spare capacity

London — OPEC and its allies thought they'd be facing a potential crisis of oversupply in the oil market in the early goings of 2020, but instead the assassination of Iranian General Qassem Soleimani has brought its limited spare production capacity back into focus.

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OPEC officials tell S&P Global Platts that the bloc is prepared to respond to any supply emergency by reversing its production cuts if necessary.

OPEC is just starting a new 1.7 million b/d cut accord with Russia and nine other partners that runs through March, of which OPEC has agreed to shoulder about 1.2 million b/d.

Factbox: Commodity markets on tenterhooks as Persian Gulf risks surge

Related coverage: US-Iran tensions

The recent surge in oil prices may prompt some members to ease off their production quotas, but a prolonged outage in the Gulf, whether in Iraq, where Chevron on Monday announced it was withdrawing its US personnel amid heightening risks, or in key US ally Saudi Arabia, could prove problematic to mitigate.

The International Energy Agency estimates OPEC's spare production capacity that can be reached within 90 days and sustained "for an extended period" at about 3.12 million b/d, two-thirds of which is in Saudi Arabia. The US Energy Information Administration, using a somewhat tighter definition that requires the output to come online within 30 days, pegs' OPEC's surplus capacity at just 1.63 million b/d.

Platts Analytics estimates global spare capacity at 2.3 million b/d, of which 1.5 million b/d is in Saudi Arabia.

"Spare capacity and SPR [Strategic Petroleum Reserve] releases from the US and others could soften the blow of a large outage, but it could be difficult to offset a major, sustained disruption," said Paul Sheldon, Platts Analytics' chief geopolitical adviser.

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SUPPLY RISKS

Brent crude prices have risen almost 6%, crossing $70/b on Monday, since the US announced late Thursday that it had conducted a drone strike in Baghdad that killed Soleimani, the head of the Quds Force, who had been coordinating several Iranian-backed militias in Iraq.

Iran has vowed to retaliate in kind, and the Iraqi parliament on Sunday passed a resolution calling for the withdrawal of US troops from the country, prompting US President Donald Trump to threaten sanctions on Baghdad.

Analysts see major risks to Iraq's crude supply if the conflict escalates. Iraq pumped 4.68 million b/d in November -- close to 5% of global crude output -- according to the latest Platts survey of OPEC production.

US officials have also warned of potential Iranian attacks on Saudi oil facilities. Saudi Arabia's critical Abqaiq crude processing facility has already been hit once, on September 14 in an attack Saudi authorities have blamed on Iran, causing half of the kingdom's production capacity to go offline temporarily, though it quickly recovered.

Saudi Arabia is the third largest global crude producer, pumping 9.90 million b/d in November, according to the Platts OPEC survey, or about one out of every 10 barrels in the world.

Should Iran be targeted by the US, its 2.15 million b/d of production could also be at risk.

Beyond that, output from major refineries in Qatar, Kuwait and the UAE may also be vulnerable to conflict, as well as the almost 25% of global LNG supply provided by Qatar and the UAE.

PRODUCTION DISCIPLINE

For OPEC and its allies, the surge in oil prices may make it difficult for de facto leader Saudi Arabia, with its fiscal breakeven price of some $75/b, to impose strict production discipline and see the cut accord extended beyond its March expiry.

Saudi energy minister Prince Abdulaziz bin Salman pledged at the OPEC+ coalition's December meeting that Saudi Arabia would overcomply with its new lower production quota by 400,000 b/d and hold output at 9.7 million b/d, as long as everybody else in the group fully complies with their quotas. Iraq and Nigeria, in particular, were put on warning for their lax discipline.

The OPEC+ coalition will meet March 5-6 in Vienna to decide on the future of their supply cuts.

Prior to the attacks, many analysts had forecast an oversupply in the market through the first half the year and expected the group to extend the cuts until at least the summer, when market fundamentals look more bullish on expected rising demand and perhaps slowing growth in US shale production.

But with Russia already publicly signalling in recent weeks that it may seek to exit the agreement and several other members chafing at their new quotas, the heightened geopolitical tensions may provide an excuse to end the deal.

On the other hand, Olivier Jakob, an analyst with Petromatrix, said that US producers could take advantage of the recent rise in prices to hedge their forward production, preventing the market from tightening.

"The geopolitical premium providing a better hedging pricing point for US producers will be a medium-term problem for Russia and Saudi Arabia as it implies that US oil supplies will be higher for longer," he said.

-- Herman Wang, herman.wang@spglobal.com

-- Edited by Alisdair Bowles, newsdesk@spglobal.com

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