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Saudi Arabia Pumps Oil Flat Out


Not content with the blow it’s dealt to U.S. oil drillers, Saudi Arabia is set to escalate the battle for market share by raising production to maximum levels.

The world’s largest oil exporter has already increased output to a 30-year high of 10.3 million barrels a day in a bid to check growth from nations including the U.S., Canada and Brazil. It will add even more to the global glut, according to Goldman Sachs Group Inc. Citigroup Inc. predicts the kingdom will push toward its maximum daily capacity, which the bank estimates at about 11 million barrels, in the second half of 2015.

Saudi Arabia steered the Organization of Petroleum Exporting Countries in November to protect its market share in the face of swelling U.S. crude output, rather than cut supplies to shore up prices as it did in the past. Having abandoned the role of swing supplier — adjusting production in line with demand — the kingdom will maximize sales to increase pressure on producers outside the group, the banks said.

“If you are Saudi Arabia and you’re looking at the new oil order we live in, you would go to full capacity,” Jeff Currie, head of commodities research at Goldman Sachs in New York, said by e-mail on June 15. “The world has come around to the realization that the U.S. shale barrel is the swing barrel.”


Historic Role

As result of Saudi pressure, U.S. drillers have reduced the number of operating oil rigs for a record 27 weeks to the lowest level in almost five years, according to Baker Hughes Inc., and oil stockpiles have shrunk as well. Brent crude plunged to a six-year low of $45.19 a barrel in January following OPEC’s refusal to cut production. The international benchmark has rebounded about 40 percent since then with the slowdown of hydraulic fracturing in U.S. shale formations. The grade fell 1.9 percent to $63.02 Friday in London.

OPEC agreed on June 5 to retain its collective output target of 30 million barrels a day, although it has surpassed that level for 12 months straight, according to data compiled by Bloomberg. Global supply exceeded demand by 1.8 million barrels a day in the first quarter, according to the International Energy Agency.

While most of OPEC’s 12 nations are already producing at maximum levels, Saudi Arabia — the biggest member and leader of the group’s market strategy — has for years kept fields in reserve capable of producing millions of barrels a day, to be deployed during times of supply disruption. The incentive to keep holding this spare capacity is waning, according to Citigroup.

Use Everything

Estimates vary on how high Saudi production might go. Oil Minister Ali Al-Naimi reiterated in St. Petersburg Thursday that his country has about 1.5 million to 2 million barrels of daily reserve capacity and is ready to increase output if demand rises. The IEA, a Paris-based adviser to industrialized nations, assesses the full capacity at 12.3 million. Saudi Arabia’s decision not to push beyond 10 million during the 2011 crisis in Libya suggests the maximum is closer to 11 million, said Seth Kleinman, head of energy strategy at Citigroup.

“The clear implication of Saudi Arabia’s new oil policy of pressuring high-cost producers is for them to increase production and exports,” Kleinman wrote in an e-mail on June 15. “With an increasingly compelling picture of lower oil prices over the next 10 to 20 years, it makes sense for Saudi to use it all and use it now.”

Rising Production

The kingdom has told OPEC’s Vienna-based secretariat that it increased output by 697,000 barrels a day between February and May. This isn’t really a signal that Saudi Arabia intends to batter rival suppliers even harder, according to BNP Paribas SA. It has been providing oil two new refineries at Yanbu and Jubail, with combined capacity of 800,000 barrels a day, and needs to accumulate inventories before its summer demand peak, the bank said.

“Any ramp up in Saudi production is to service increased domestic demand, rather than increase exports,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London, said by e-mail. Long-term prices are already low enough to deter investment in high-cost Canadian oil sands or the North Sea, he said.

Citigroup points to other signs that the Middle Eastern country is taking a more aggressive stance, bolstering output because of concerns that, even at lower prices, non-OPEC supplies will still expand and global demand is peaking.

The number of rigs drilling for oil in Saudi Arabia rose to a record of 81 in April, an increase of more than a fifth since the start of the year, according to data gathered since 1995 by Baker Hughes.

The lower outlook for prices “turns oil in the ground in Saudi from an appreciating resource into a depreciating resource,” said Citigroup’s Kleinman. “If it’s depreciating, you produce it all as fast as you can.”


9 Comments on "Saudi Arabia Pumps Oil Flat Out"

  1. Jimmy on Tue, 23rd Jun 2015 1:19 am 

    Production is up but exports are down.

  2. shortonoil on Tue, 23rd Jun 2015 8:06 am 

    “If it’s depreciating, you produce it all as fast as you can.”

    Our Model has been projecting a long term decline in price for over a year:

    If the Saudis agree with us (and apparently they do) they will pump every barrel as fast as possible before the price declines further. The Saudis realize that they not only have to deal with the depletion of their own fields, but also with the depletion of every other field in the world. It now all boils down to the last man standing!

  3. Speculawyer on Tue, 23rd Jun 2015 12:15 pm 

    I wonder if this is a push to keep oil prices low for a while so people keep buying gas guzzlers. Eventually the loss of the frackers and a reduction in production from the Saudis will let oil prices creep back up. . . . and they’ll have lots of captive customers with another 5 or 7 years of loan payments on their gas guzzlers.

  4. Dredd on Tue, 23rd Jun 2015 5:30 pm 

    Poison salesmen do not respond to logic and proportion.

  5. Nony on Tue, 23rd Jun 2015 5:40 pm 

    So much for Simmons Twilight in the Desert and Staniford Nosedive Toward the Desert.

    The Saudi Arabia conspiracy to cover up their lack of oil meme seems really silly in retrospect. What has happened with SA output shows badly for the peaker predictors.

    All the SA economic interests are better served by covering up how much they have and by encouraging a vision of scarcity. That drives the price up. Conversely, if they were really running out in the future but kept it hidden that would mean selling a valuable good at a depressed price (because oil markets price in a future view of supply and demand).

    A much more rational explanation of Saudi production volume (which over the 2000s, now looks like a sawtooth) is that they were either random changes based on operations or moves made designed to raise price. In particular, we had the 2009 unquestionable market intervention. That should make anyone think a little harder about whether SA had some hand in helping to get prices up from 2004 to 2008.

    OPEC is a cartel. An imperfectly functioning cartel. But a cartel, with at least the aims of a cartel and with occasional impact. For instance, look at the big drop we had in OCT after the OPEC meeting (even after markets had priced in a majority analyst opinion of no action, still the confirmation moved the market).

  6. joe on Tue, 23rd Jun 2015 5:57 pm 

    Opec is indeed a cartel, but cartels exist to have a controlling influence of markets. Recent actions by opec show they do not control markets right now, which is why they have had to act in a way that is totally illegal in most countries and is driving it’s competitors out. They know that long term growth will give room for all in the end, but they did temporarily lose control when prices dropped due to tight oil coming on so fast. But it seems they have been successful in their endeavours, ironically it will leave supply and demand razor thin, and that will drive up prices and cause the same thing to happen again.

  7. Nony on Tue, 23rd Jun 2015 6:19 pm 

    If you are in a cartel and the cartel stops working, then you have to compete. SA would probably prefer to be selling 9MM bpd at $100/bbl rather than 10MM bpd at $65/bbl. But they know they don’t have the choice. And they will keep their market share, because they have lots of cheap oil and can win any price war (Simmons and Staniford were wrong).

    US LTO cracked the cartel (along with other supply…but probably US LTO was the majority of the marginal barrels). The Saudis aren’t going to repeat 1986 and watch their production go down to 3MM bpd while they prop up the market.

    Anyone who watched the last 3 years of growth and saw how the US added a million every year and even in an accelerating manner, had to take it seriously. All the kvetching about Ponzi scheme at 100+/bbl was silly. Almost every well getting drilled was profitable at those prices. And the plays were not “running out”. There was and is a huge amount of drilling locations left in the Eagle Ford and Bakken. Hz drilling in the Permian was accelerating. Niobrara was starting to take off and even riskier plays like the rubble zone of the TMS.

    Bottom line is 100/bbl was not sustainable because of US LTO. Dumping an extra 4+ MM bpd on the market has an impact!

    Watch this video and particularly the discussion around minute 22-28

    And for anyone who sees me as a denier or thinks that peakers should always be one way or cornies the reverse, I’m not there. Yes, at 100/bbl, US LTO was very real and positive. At less than 70, it’s not. It’s possible to have this nuance view. Really it’s just basic micro econ.

  8. Nony on Tue, 23rd Jun 2015 6:22 pm 

    9*100 =900, bigger than

    But they don’t have a choice. If they tried to stay at 100, they would end up at something like in 1986:


  9. Davy on Tue, 23rd Jun 2015 6:57 pm 

    NOo, you tell a good story but you are far too focused on oil and prices and oblivious to many other life factors. There is so much more going on in the world you can’t get your head around. You are too sure of yourself. I am not saying you are wrong NOo just misguided by your large brain much like modern man. A large brain will man’s evolutionary dead end. It will be your monkey trap.

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