More on the Saudi oil output slash

Soon after we posted the piece on April 18, regarding the report from the Saudi Oil Minister, Ali al-Naimi, we discovered an article we’d clipped from the Oil & Gas Journal, sourced from the Oil & Gas Journal Online, dated March 28 (two days before the President’s energy speech).  So, this March 28 article actually contained the “big news” that Mr. Naimi delivered on April 18.

This article quoted Barclays Capital managing director Paul Horsnell:

“Saudi Arabia’s production is estimated at 8.2 million b/d. [which is what Naimi said they had indeed produced in March, 4 weeks later]  However, Horsnell said, recent data are pointing to Saudi output close to 9 million b/d in December and “and at that level in January and February.” [so Naimi just confirmed these numbers, 4 weeks later]

“He said, “This has two main implications. First, it is the source of another downward revision of start-of-year spare capacity levels, since Saudi Arabia’s output has been higher than was originally reported.  The second implication is in what it suggests to us about how much Saudi Arabia needs to produce to balance the market.”

In other words, Mr. Horsnell is saying that Saudi evidently needed to produce at 9 million b/d in order to balance the market – the exact opposite of what Naimi said, 4 weeks later.

Mr. Horsnell went on to say:

“Even producing 9 million b/d, Saudi Arabia still has left “a significant deficit at the margin of the market with inventories falling faster than normal, even before Libyan exports came off the market.  Allowing for a normal second quarter global inventory build and replacing lost volumes from elsewhere seems likely to require Saudi Arabia to move up to 10 million b/d, in connection with higher volumes from the other holders of spare capacity …”

This doesn’t sound much like a market that is oversupplied …

Earlier in the same article, with respect to demand, Mr. Horsnell said:

“Oil demand growth in 2010 earlier was estimated at 2.57 million b/d, with 2011 growth previously forecast at  1.56 million b/d.  Now 2010 demand growth is put at 2.83 million b/d-making it “the strongest year for global oil demand growth over the past 30 years.”

This doesn’t seem to jive with the drop in demand/oversupplied market to which Mr. Naimi referred …

Tom Whipple, a former government analyst and current Peak Oil news aggregator came out soon after the Naimi announcement, outlining the oversupply scenario.  However, on April 25, Mr. Whipple supplied some alternate explanations for the Saudi cutback.  One of his explanation’s revolved around the fact that Saudi oil production has finally reached the practical limits to its growth, and that the Saudi’s could not sustain the 9+ million b/d rate comfortably.   Stuart Staniford, a PhD physicist and self-inspired analyst of Saudi production, provided some interesting graphs on April 13.  Looking at one of those graphs in particular, what stands out is the substantial rate variation in the 2003-2011 period.  Of course, Saudi is the ultimate swing producer.  But with the exception of a period in 2005, it appears that rates never stay above 9 million b/d day for very long; even in face of high prices and a tight market the rates come down substantially, after a brief peak.  One might worry that the Maximum Reservoir Contact wells in Ghawar and likely elsewhere are coning water after a short run at high rates, and that the wells might be threatening to water out if these high rates are sustained.  What this would mean is that the often touted “worldwide spare capacity” of 3 million b/d or so … is just not there (as it derives primarily from the Saudis).  If true – if the Saudi’s can’t really sustain even 9 million b/d – then this would have serious implications for the world in that the next, more intense manifestations of Peak Oil may be nearer than we think.

(Mr. Whipple also offered an alternate explanation in terms of “the Saudi’s making a political statement” in their cutting of production.  Namely, that the Saudis were upset with the flip-flops in US support for some of the other Arab regimes.  This might be, but in light of the prior, substantial fluctuations shown by Staniford, it seems that some mechanical explanation is a better fit.)

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