* Any big supply break may need strategic reserve respone
* Almost 3 million bpd off the market due to outages
* Most spare oil capacity in Saudi Arabia
By Alex Lawler
LONDON, July 1 The world's unused spare oil
production capacity would struggle to cover for another big
outage, industry officials and analysts say, increasing the
chance governments may tap strategic reserves should Iraq's
southern exports be disrupted.
Unrest in Iraq comes as the almost total loss of Libyan
supply, Western sanctions on Iran as well as conflict in Syria
and northern Iraq are keeping almost 3 million barrels per day
(bpd) - more than 3 percent of world demand - off the market.
More Saudi Arabian supply, and the U.S. shale oil boom, have
helped plug gaps, but another crisis would deepen dependance on
the Saudis, who are alone in holding significant amounts of
unused production capacity.
Militants from the Islamic State in Iraq and the Levant
overran the northern Iraqi city of Mosul in June, increasing
concern of a disruption to exports from the second-largest OPEC
producer. So far, Iraq's southern shipments are not affected.
Global spare production capacity stands at 3.3 million bpd,
the International Energy Agency estimated in June. Iraq produces
about 3.3 million bpd and exports about 2.5 million bpd from its
southern terminals around Basra.
"If we were to have another big outage, spare capacity would
be really tested," said Olivier Jakob, oil analyst at
Petromatrix. "The answer to a big disruption is going to come
more from the SPR than from spare capacity."
The SPR, or the Strategic Petroleum Reserve of the United
States and similar reserves held by other industrialised
countries through their membership of the IEA, are consumer
countries' last resort in case of supply outages.
Another big outage would also encourage the case in the West
for relaxing strict monitoring of Iran's oil exports, stunted by
sanctions over Tehran's nuclear prgramme.
Strategic reserves were last tapped in 2011 during the
Libyan conflict. China, not an IEA member and the second-largest
oil consumer after the United States, also holds stocks.
"A major hit in or around Basrah would be very bullish in
the short term for prices, and would likely lead to an IEA/SPR
release," said a former government official involved in
strategic reserves, now working for an oil company.
Iraqi officials say the southern oilfields that produce
almost all of the country's exported oil are safe. OPEC
Secretary General Abdullah al-Badri says the group is ready to
pump extra oil if needed.
Of the 3.3 million bpd of spare capcity the IEA estimates is
available, some 2.65 million bpd is in Saudi Arabia, the world's
A Saudi official last week reaffirmed the kingdom's
willingness to make up shortages.
"Saudi Arabia has the capability to produce up to 12.5
million bpd when the customers ask for it," a Saudi official
said. "The oil resources, production facilities and the
management all support this."
But some in the industry question how sustainable the full
12.5 million bpd is. The kingdom has not been known to boost its
production that far - output touched 10.1 million bpd in 2013,
believed to be the record high.
"Saudi Arabia may very well be technically capable of
supplying close to 12.5 million bpd, but probably only by
drawing down stocks and thereby for a limited amount of time,"
said David Wech of JBC Energy.
As a result, readily available spare capacity may be less
than the IEA's official estimates.
"Global spare capacity is 1.5 million bpd, overwhelmingly in
Saudi Arabia, although for short periods of time we could draw
on surge capacity of say another 1 million bpd," said a former
IEA official. "People are surprisingly complacent, I think."
Apart from Saudi Arabia, supply could also increase in the
short term should Western sanctions on Iran, in place over its
nuclear programme, be removed, analysts including Jakob said.
But there is no sign of that happening yet.
It is therefore fortunate that Iraq's southern oil ouptut is
unaffected so far. Brent oil has fallen to below $113 a
barrel from the nine-month high of $115.71 it reached on June 19
as traders saw less of a risk of disruption.
"Should there be no meaningful disruptions to Iraq's oil
production - as we expect - the Brent price should correct most
of its recent increase," said Eugen Weinberg, analyst at
Commerzbank in Frankfurt.
"Should there be any meaningful disruption, a price rise to
at least $120 per barrel should be expected."
(Editing by William Hardy)