* Only Saudis have spare oil capacity and it is very thin
* Constraints could signal higher oil prices
* Graphic on global spare capacity and fiscal breakeven:
By Dmitry Zhdannikov
LONDON, Sept 8 A battle for market share between
oil producers has left the world awash with stocks of unwanted
crude and driven a collapse in prices over the past two years.
But a study of one often overlooked oil market parameter --
spare capacity or the ability of producers to quickly ramp up
output to cushion against unexpected supply cuts elsewhere --
shows that a major bullish trend for prices could be building.
With Iran, Iraq, and Gulf nations Kuwait and the United Arab
Emirates all producing at or almost at capacity, there is only a
handful of states that have a significant gap between current
production levels and what they can produce in theory.
The word "theory" is key here, though, as those countries
include Libya, Nigeria, Venezuela and Saudi Arabia.
The chances of an end to unrest in Libya and Nigeria or of
Venezuela overcoming its social and economic problems and
ramping up production are so low that most analysts are writing
off theoretically higher capacity levels in those countries.
That leaves Saudi Arabia, the only major traditional swing
supplier, as the sole global central bank of spare capacity. But
the assumption also comes with a caveat.
Having told the market for many years that they can produce
12.5 million barrels per day if needed, Saudis, including Deputy
Crown Prince Mohammed Bin Salman, have said this year they can
ramp up supply immediately only to 11.5 million bpd.
Deduct from that figure Riyadh's current record output of
10.7 million bpd, and that leaves Saudi and effectively global
spare capacity at only 0.8 million bpd -- the lowest on record
and not enough to cover even one major supply outage.
"Supply constraints seem a distant prospect in the current
oil market, but a return to balance in 2017 will leave the world
with severely limited spare capacity," HSBC's oil industry
analysts said in a note.
Others broadly share that view.
"In a market full of disruptions and uncertainties, if there
was a blow up of the scale of Canada once again, we would see
oil prices rise like we did pre-summer," said Abhishek
Deshpande, an analyst at Natixis.
Wildfires in the Canadian region of Alberta in May cut the
country's daily output by 1 million barrels and were one of the
factors that pushed oil prices to a six-month high.
So is it inevitable that when global oil demand finally
rises close to or above supply in the next few months, prices
will jump on fears of a lack of spare capacity?
For analyst Deshpande, countries like Nigeria still pose
downside risks as their contribution to the market is
"Assuming all countries were producing at their optimal
levels, including Libya and Nigeria, and markets were balanced,
it is then I would be really worried about thin spare capacity,"
Meanwhile Iraq, Kuwait, the UAE and Saudi Arabia are all set
to add new capacity in 2017 as they are drilling on new fields.
Separately, the world has accumulated so many stocks over
the past two years -- standing at a record 3 billion barrels
according to the International Energy Agency -- that they have
become a substitute of sorts for spare capacity.
Before the supply glut started building in mid-2014, stocks
stood at just 2.6 billion barrels. It would take many months to
bring them back to that level if demand were finally to exceed
supply next year.
However, some observers believe that the constraints on
spare capacity mean a bigger cushion needs to be maintained.
"There is no reason stocks should return to pre-collapse
levels. The lack of swing suppliers calls for more," said
veteran OPEC watcher Jamie Webster.
(Reporting by Dmitry Zhdannikov; Editing by Keith Weir)