* Saudi spare capacity may fall to unprecedented levels: IEA
* Brent gains as much as 2.3% after plunging 6.9% on Wednesday

By Grant Smith

(Bloomberg) —

Oil rose in London, recovering some of the biggest losses in more than two years, as the International Energy Agency warned that output in OPEC’s Gulf members may be stretched to the limit by supply losses elsewhere in the group.

Brent crude climbed as much as 2.3 percent after slumping 6.9 percent on Wednesday, the steepest loss in percentage terms since 2016. Saudi Arabia may see its spare capacity dwindle to “unprecedented” levels as it seeks to offset losses in Venezuela, Iran and beyond, the IEA said in a report. Prices sank yesterday even though U.S. crude inventories fell the most in almost two years, amid concern the escalating trade war between the U.S. and China will hurt economic growth.

“The fundamental reality of low spare capacity globally and Iranian output set to decline considerably” should “keep the oil market vulnerable to disruptions in the year ahead,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich.

Oil rallied to fresh three-year highs in the past few weeks as global output disruptions and renewed U.S. sanctions on Iran raise concerns of a supply crunch. While bracing for the potential escalation of the trade war, oil markets are also awaiting more clarity on U.S. policy on Iranian crude exports as well as whether the Organization of Petroleum Exporting Countries can increase production to alleviate market tightness.

Brent Tumbled

Brent for September settlement added 1.8 percent to $74.75 a barrel on the London-based ICE Futures Europe Exchange at 11:06 a.m. local time. Prices on Wednesday tumbled $5.46, the sharpest pullback in dollar terms since 2011. The global benchmark traded at a $5.08 premium to West Texas Intermediate for the same month.

WTI crude for August delivery rose 0.9 percent to $70.98 a barrel on the New York Mercantile Exchange, after slumping $3.73 on Wednesday. Total volume traded was about 31 percent above the 100-day average.

Saudi Arabia’s spare production capacity may fall to unprecedented levels of below 1 million barrels a day as the kingdom tries to make up for losses in Iran and Venezuela, the Paris-based IEA said. Iran’s exports could slump 50 percent or more as U.S. sanctions deter buyers, and Venezuela’s economic crisis may drag its output below 1 million barrels a day, according to the agency.

After President Trump’s administration earlier this week unveiled a list of $200 billion of Chinese products that will face additional tariffs, China vowed toretaliate. Then later, China’s Vice Minister of Commerce Wang Shouwen calledon his U.S. counterparts to resolve the conflict through a new round of bilateral negotiations.

Meanwhile, U.S. crude stockpiles fell by 12.6 million barrels last week, the Energy Information Administration said in a report. That compares with a drop of 3.79 million forecast in a Bloomberg survey of analysts. Inventories at the key storage hub in Cushing, Oklahoma, declined by 2.06 million barrels to the lowest since December 2014.

Other oil-market news:

* In Norway, a strike that forced Royal Dutch Shell Plc to shut its North Sea Knarr field appears unlikely to cut any more production in the short term.
* Oil’s selloff on Wednesday looks to have been machine-driven and provides buying opportunity, with fundamentals for crude seen tight for summer, Citigroup says in a July 12 note.

–With assistance from Alex Longley and Tsuyoshi Inajima.

To contact the reporter on this story:
Grant Smith in London at gsmith52@bloomberg.net

To contact the editors responsible for this story:
James Herron at jherron9@bloomberg.net
Helen Robertson, Rakteem Katakey