Global oil risks high before latest Iran threat Even before Iran threatened to halt crude shipments to four European countries on Wednesday, the outlook for global oil supplies was looking decidedly grim. Risks to output, once confined to the Middle East, are now spreading to Africa. Inventories are low. And the ability of Saudi Arabia to make up for any shortfall is being called into question. "Not since the late 1970s-early 1980s has there been such a serious threat to oil supply," a report by Deutsche Bank said. Yet such concerns are counterbalanced by equally weighty doubts about demand. Both Opec, the oil cartel, and the International Energy Agency last week revised down their forecasts for oil demand growth in 2012, based on worries about the weak global economy and in particular the eurozone debt crisis. Oil prices tell a different story, however. They have stayed stubbornly high despite the renewed threat of recession in Europe, suggesting a market tightness that belies the IEA's decidedly unrosy outlook. Brent crude has jumped $7 a barrel this month to more than $118/bbl, and on Wednesday rose even higher, to $119.99/bbl. That was the highest intra-day price since last summer, though it later fell back below $119/bbl. "There is no sign in the physical market that we're choking on a surfeit of crude," says Seth Kleinman, a commodities analyst at Citi. There is little redundancy across the whole system: inventories are really low, and there's low spare capacity and supply risks: for example, South Sudan. The state of the physical market is reflected in the shape of the oil curve - the price difference between contracts for immediate delivery and those with a longer delivery date. The curve is currently showing a downward slope, known in the industry as "backwardation," with contracts for immediate delivery trading at a significant premium to forward contracts. "What's driving the shape of the curve is near-term fundamentals," says Mike Wittner, oil analyst at Société Générale. It's telling you there's some tightness in the market. That tightness is mostly a result of supply side issues. South Sudan, embroiled in a dispute over transit revenues with Sudan, has shut down production, depriving the market of about 300,000 barrels a day. Unrest in Yemen is also a worry, with a strike halting output at the country's largest oilfield, Masila. Syrian exports are blocked by international sanctions. And Libyan exports, while recovering far faster than anyone expected, are still way off their pre-war levels. Barclays Capital estimates that the problems in Sudan, Yemen and Syria alone could together curtail over 1m barrels a day of output - more than 1 per cent of global supply. That is now compounded by the looming European ban on Iranian imports, which will deprive the European Union of up to 600,000 barrels a day of crude. Iran will find alternative buyers for some of those barrels - but not all of them. Most analysts expect it will have to take a lot of its oil off the market and put it into floating storage in the Gulf, further squeezing global supply. Opec, and in particular Saudi Arabia, can step in to make up the shortfall. The kingdom has plenty of spare capacity - the emergency cushion of extra production that it keeps in reserve, partly to cope with global supply disruptions such as Libya last year. But with Saudi pumping at nearly 30-year highs, Opec spare capacity is "approaching dangerously low levels," writes Goldman Sachs - and this "just as world economic growth is beginning to strengthen." "This leaves the world oil market increasingly vulnerable to sharply rising prices in 2012," the bank says in a research note. The supply disruptions and low spare capacity come at a time of historically low stock levels. Most analysts had expected that strong Saudi production and recovering Libyan output would push up global stocks of oil. But the opposite is true: at the end of January, total crude oil and refined products inventories in the OECD club of rich nations were at their lowest levels since 2008. The IEA said that in December, OECD stocks came in below the historical average for a sixth consecutive month. Those trends have continued into this year. The IEA said preliminary figures for January showed an 11.4m barrel climb in inventories, but much lower than the five-year average increase of 43.2m barrels. The figures were particularly striking considering the much warmer-than-normal winter weather in the US and western Europe, Goldman Sachs said. Prices are also supported by strong demand in China and the countries of the former Soviet Union. Russia has been breaking records, pushing its oil production to post-Soviet highs - in January output increased to 10.7m b/d, 1.5 per cent higher than a year previously. But despite that, overall exports from the former Soviet Union have fallen - largely due to growing consumption of oil at home. Given all these pressures, with the drumbeat of geopolitics growing louder and more positive economic data coming through, oil market fundamentals are expected to strengthen, analysts say. "The path of least resistance for prices is still to the upside," says Barclays Capital.