Nigeria Plus OPEC Strategy Could Equal Oil Shock: Bloomberg

Analyst Julian Lee worries that rising production means the world is less able to cope with a big supply disruption.

An impending global oil market rebalance brings its own set of problems, partly due to the Organization of the Petroleum Exporting Countries'strategy of locking down its share of the market.

Julian Lee, oil strategist for Bloomberg First Word, writes, "rising production means the world is less able to cope with a big supply disruption than at any time since the financial crisis," and that this could spell disaster when demand outstrips supply.

That's because the volume of oil that can be brought into production within 90 days and sustained for an extended period (global spare capacity) stands at 3.44 million barrels per day (bpd), "But much of that may not be available as quickly as you'd hope," according to Lee.

He goes on to note that almost all usable spare capacity is held by Saudi Arabia, and that it can raise output to 11.5 million bpd immediately: "To this we can probably add 100,000 barrels each from Abu Dhabi, Kuwait, Iran, and Iraq, but that's about it: 1.7 million bpd of immediately available capacity."

Lee's worry is that an event of the magnitude of Iraq's 1990 invasion of Kuwait could occur in the foreseeable future, and points out that this event alone deprived the world of over 4 million bpd of supply overnight and resulted in a three year and 20 year wait for output in Kuwait and Iraq respectively to fully recover.

The analyst dismisses the idea of strategic and commercial stockpiles satisfying demand during a disruption: they "provide some security, but they're a one-off: once drawn down, they're gone."

Lee points to the collapsing Venezuelan economy as a potential cause for concern but singles out Nigeria as "the prime candidate for disruption" due to mounting civil unrest.

He concludes, "There's no shortage of production at risk and a dwindling amount of spare capacity to compensate; this is far from an academic concern."

For its part, ESAI Energy LLC is betting on Venezuela to cause the most trouble first: last August it warned that the country could soon default on its debt payment, which in turn would trigger a major disruption in oil and products supply, including bunkers.