The recent drop in oil prices by around $10/b is a welcome change and gives breathing room to oil consumers, but the market is not out of the woods yet and the coming months will be very challenging, Fatih Birol, executive director of the International Energy Agency, said Tuesday.  In Asian trading hours, December ICE Brent crude futures were trading at $76.69/b, down nearly 1% from Monday’s close. In early October Brent crude had crossed the $86/b mark on the back of geopolitical tensions, its highest since 2014.  “We are going through very challenging times in oil markets,” Birol said, citing three important factors at play: oil demand that is still very strong despite signs of slowing growth, supply constraints like Iranian exports in decline and Venezuelan production in freefall, and tightness in markets as Saudi spare capacity has shrunk.

Saudi Arabia’s spare production capacity, the key cushion in the global oil market, has fallen to levels that are very worrying, Birol told reporters on the sidelines of the Singapore Energy Conference.  “I have the confidence that other producers will come in the picture, especially the Gulf countries, and comfort the markets,” he said.  Markets have been concerned about Saudi spare capacity for several weeks, with the kingdom under pressure from the US to raise crude output to cool rising prices. Earlier this month it said it was pumping 10.7 million b/d, near its all-time high.  Once Saudi Arabia’s crude production reaches 11 million b/d, the kingdom’s spare capacity will be at the lowest level since it stood at 1 million b/d in January 2006, according to Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp.