OPEC is pumping at near record levels to plug the Iran hole and meet domestic demand. Spare capacity is a concern.

Big Asian oil consumers (other than India) continue to cut oil purchases from Iran.

WSJ: - China, Japan and South Korea, Asia's largest oil consumers, significantly cut imports of Iranian crude in the first quarter of 2012 after the U.S. and the European Union moved to tighten sanctions against Iran over its nuclear program, opening the way to rival suppliers.

Iran is the world's fifth-largest oil producer, exporting about 2.26 million barrels a day of crude in the first half of 2011, according to the U.S. Energy Information Agency.

China, Japan, India and South Korea made up the bulk of its customers, accounting for 59% of its exports or 1.46 million barrels a day. Iran, on the other hand, accounts for about 10% of each of those countries' crude imports.

Between January and March 2012, China cut Iranian crude purchases by a third to about 350,000 barrels a day because of a pricing dispute which has since been resolved--it has consistently said that it respects only U.N.-imposed sanctions.

Japan and South Korea cut imports by more than 20% to 330,000 barrels a day and 200,000 barrels a day, respectively, as political pressure from the U.S. mounted.

Japan cut imports from Iran in 2011 and said it would accelerate cuts this year. South Korea has moved more slowly, saying it will review planned cuts with the U.S, and it is in talks with Washington over how much it will need to trim to avoid retaliation

To compensate for the Iran cuts, OPEC (ex-Iran) and in particular Saudi Arabia is pumping at recent record levels.

Source: Barclays Capital

In addition to the hole left by the Iran sanctions, the Saudis are pressured to pump more in order to meet their own rising domestic demand. This is putting strains on OPEC's spare capacity. Even though the Saudis are reporting some 1.8 mb/d of capacity, according to Barclays Capital, the sustainable component of this is closer to 1 mb/d.

OPEC spare capacity (Source: Barclays Capital)

Aware of the capacity constraints and concerned about not being able to meet demand, the Saudis are rapidly increasing oil in storage.

GS: - Inventory building consistent with our view that Saudi effective spare crude oil production capacity is limited .

Saudi Arabia oil inventory (kbbl, source: Joint Organisations Data Initiative)

The Saudis are preparing for prolonged Iran sanctions, rising domestic demand (the Saudis are part of the BICS demand growth with close to 7% GDP growth), and possible supply disruptions should tensions with Iran escalate. Above all, this tells us that OPEC's limited spare capacity is becoming a concern.

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