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Highlights

US sanctions aim at Iran's 1.2 million b/d crude exports

IEA pegs OPEC spare capacity at 3.30 mil b/d

OPEC/non-OPEC quotas provide less cushion

London — The looming lapse of sanctions waivers for imports of Iranian crude, along with the intensifying clashes in Libya and continued crisis in Venezuela, has put OPEC's spare production capacity back in focus.

In announcing Monday that the US would not renew waivers granted to eight countries to continue purchasing Iranian crude, officials said they had closely coordinated with their counterparts in Saudi Arabia and the UAE to "ensure market stability."

But any increase in production by those two core OPEC countries and other like-minded members could somewhat hamstring the organization's ability to respond to other supply outages, if it is to maintain its role as the global swing supplier.

OPEC in March pumped 30.23 million b/d, its lowest level in more than four years, due in large part to power outages in Venezuela and production discipline by Saudi Arabia, according to the latest S&P Global Platts OPEC production survey.

The International Energy Agency estimates OPEC has some 3.30 million b/d of spare production capacity available -- 2.20 million b/d of which is held by Saudi Arabia.

That is more than sufficient to compensate for an extreme scenario loss of some 1.2 million b/d of Iranian crude exports, if the US is successful in its aim of bringing those volumes to zero through its sanctions.

However, Saudi Arabia and the UAE, two of the key architects of an OPEC/non-OPEC supply accord who have pressured other members to maintain output discipline to bolster prices, likely will be careful to stay within their production quotas, in order to maintain unity among the coalition, sources said.

Saudi Arabia can increase its production by about 500,000 b/d before reaching its quota, the most of any OPEC member by far, while the UAE has just 20,000 b/d of room under its cap.

Still, the naked acknowledgment of policy coordination between the two countries and the US will not sit well with other members and throws an extension of the OPEC/non-OPEC accord, as Saudi Arabia has been pushing, into doubt.

OPEC is to meet on June 25 to decide on the future of the deal, which expires at the end of that month, with Russia and eight other non-OPEC participants joining talks a day later.

"The Declaration of Cooperation may be at risk," one non-Gulf OPEC source said on the condition of anonymity, referring to the accord.

Gulf OPEC officials have so far spoken with one voice, saying they had yet to commit to any production increase and were waiting to see how the sanctions crackdown impacts the market, when the waivers expire May 2.

A top US Department of State official said Tuesday that tougher Iran sanctions enforcement would essentially lead to an end of the OPEC/non-OPEC cuts.

Brian Hook, special representative for Iran, told reporters during a briefing the US government sees plenty of global supply, given the Saudi and UAE commitments and US production growth.

"We're very pleased with the state of the market and we see the trend lines are extremely positive," Hook said. "And having the commitments from other major producers is meaningful. It is effectively reversing the voluntary curtailment that they had undertaken."

"A decision will be made only after the review of [oil] prices and how that influences the prices," Kuwaiti oil minister Khalid al-Fadhel told Platts in Tokyo on Tuesday. That followed comments from Saudi energy minister Khalid al-Falih on Monday that the country would "coordinate with fellow oil producers to ensure adequate supplies are available to consumers while ensuring the global oil market does not go out of balance."

SUPPLY RISKS ABOUND

What OPEC wants to avoid is a repeat of last summer.

Then, Saudi Arabia and the UAE sparked the ire of several other members -- and even led to an existential crisis for the organization -- by significantly ratcheting up their production in excess of their quotas, under pressure from the US to keep oil prices low in advance of November, when the White House was set to reimpose the Iran sanctions.

They were then caught off guard when the US announced the sanctions waivers, which caused oil prices to tank towards the end of 2018, over fears of oversupply.

That resulted in an extremely tense December OPEC meeting, when Qatar quit the organization and Iran reportedly threatened to do the same, before Saudi Arabia acquiesced and gave Iran an exemption from the production cut agreement that now hangs in the balance.

Since then, Venezuela's production has plunged 430,000 b/d in three months, though it could recover somewhat in April with electricity supplies back online to power its pumping stations and upgraders, and Libya faces a threat to its 1.1 million b/d of crude production from fighting between the self-styled Libyan National Army and forces aligned with the UN-backed Government of National Accord.

Nigeria on Sunday suffered a fire on a key 150,000 b/d crude pipeline, with operator Aiteo issuing a force majeure declaration and suspecting sabotage.

Algeria also has seen turmoil, with weekly mass protests even after the ouster of long-serving President Abdelaziz Bouteflika, though no production has yet been impacted.

Sudan, a non-OPEC participant in the production accord, has likewise seen widespread protests seeking civilian rule after its strongman president, Omar al-Bashir, was deposed by the military earlier this month.

"Amid seasonally higher oil demand into the summer, the oil market is likely to be very sensitive to any further disruptions in Libya, Venezuela or Nigeria," said Giovanni Staunovo, commodity analyst at investment bank UBS.

That will place a spotlight on a key OPEC/non-OPEC monitoring committee meeting on May 19, just over two weeks after the Iran sanctions waivers expire. Saudi Arabia, which co-chairs the nine-country Joint Ministerial Monitoring Committee along with Russia, is hosting the meeting in the Red Sea port of Jeddah.

The JMMC -- ostensibly about monitoring quota compliance and assessing market conditions -- will set the tone for what could be a geopolitically volatile lead-in to June's critical OPEC/non-OPEC meeting in Vienna.

OPEC spare capacity (million b/d)
Algeria 0.03
Angola 0.05
Congo 0
Ecuador 0.01
Equatorial Guinea 0
Gabon 0
Iran n/a*
Iraq 0.36
Kuwait 0.23
Libya 0
Nigeria 0.08
Saudi Arabia 2.2
UAE 0.34
Venezuela 0
TOTAL OPEC 3.3

* Excludes Iranian crude supply offline due to sanctions

Source: International Energy Agency

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

-- Meghan Gordon, meghan.gordon@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com