Oil price bounces back over International Energy Agency fears of supply problems

Saudi Arabia might have to draw harder than ever before on its spare production capacity as a spiraling economic crisis in Venezuela, renewed USA sanctions on Iran and disruptions in Libya strain global markets, the agency predicted.

Oil prices steadied on Thursday after sharp losses the previous session as the International Energy Agency (IEA) said the world's oil supply cushion "might be stretched to the limit" due to production losses.

"This will become an even bigger issue as rising production from Middle East Gulf countries and Russian Federation, welcome though it is, comes at the expense of the world's spare capacity cushion, which might be stretched to the limit".

"Rising production from Middle East Gulf countries and Russian Federation, welcome though it is, comes at the expense of the world's spare capacity cushion, which might be stretched to the limit", the Paris-based agency said in its monthly report.

Raising output further could shrink the country's spare production capacity - the crude left idle for emergencies - to "an unprecedented level below 1 million barrels a day", the IEA predicted.

"This vulnerability now underpins oil prices and seems likely to continue doing so", the IEA added. Much of it is located in the Middle East. " on Thursday. "I think it may increase 1.5% per year over the next several years ... that's 1.5 million barrels per day and the decline rate of so many OPEC countries means that the Saudi's are really going to try to hold it together for OPEC but they are not going to be able to".

If the Saudis raise production to a record 11 million barrels a day next month, as they've indicated they might, it would be the kingdom's biggest increase over a two-month period since 2011, the IEA said.

Supply to the USA market has also been squeezed by the loss of some Canadian oil production.

"We see no sign of higher production from elsewhere that might ease fears of market tightness", the IEA said.

FILE PHOTO: Oil storage tanks are seen from above at the Cushing oil hub, in Cushing, Oklahoma, March 24, 2016.

And while Iran has yet to feel the full impact of renewed U.S. sanctions, the IEA fears there could be "an even steeper reduction than the 1.2 million barrels per day seen during the previous round of sanctions".

"Higher prices are prolonging the fears of consumers everywhere that their economies will be damaged". Iran exports roughly 2.5 million bpd, most of which goes to Asia.

But supply concerns were highlighted again by the IEA, which reminded investors of the large number of output disruptions keeping pressure on global oil supply.

Iranian crude exports to Europe dropped by almost 50 percent in June, the IEA said, as refiners gradually wind down purchases before USA sanctions take effect in November.

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