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Saudi Arabia Will Continue To Cut Oil Output For Months And Years …

Saudi Arabia Will Continue To Cut Oil Output For Months And Years … thumbnail

Saudi Arabia has kept its promise. It has cut oil output by 486,000 barrels a day, in line with the OPEC agreement the Kingdom pulled together last October, helping oil stabilize above $50 per barrel.

That’s music in the ears of American frackers, who have been bringing oil rigs back to life at a feverish rate—111 in the last two weeks alone; countering Saudi oil cuts, and keeping oil prices in the $50 to $60 range, for now. 

Financial Product

Three-month Performance

iPath S&P GSCI Crude Oil (OIL)


United States Oil Fund (USO)


Market Vector Oil Services (OIH)


Source: 1-27-2017 

Still, Saudi Arabia’s output cuts are just the beginning of a trend that is expected to last for months and years to come, irrespective of what American frackers do.

There are good reasons for that.To begin with, the Kingdom has learned a lesson the hard way: it cannot end the American fracking revolution by engaging in a price war with American frackers — which have demonstrated an exceptional ability to survive even at extremely low prices.

Moreover, Riyadh’s leaders do not want to antagonize the new Washington administration by declaring another war on American frackers.

Then, there’s Riyadh’s grand plan: the Aramco IPO — sell shares of state-owned company Aramco to the public to finance its vision 2030, which will make the Saudi economy less dependent on oil.

The success of Aramco’s IPO, which promises to be the biggest in history, relies heavily on the state of the oil and equity markets at the time of the “road show”– the date for marketing of the IPO. The higher the oil prices, the easier it will be to sell Aramco to institutional investors at a high price.

But there’s another factor, more fundamental, which will cause output cuts to last beyond the IPO. The Kingdom may be running out of oil faster than previously thought. Its major oil fields have become mature, and new fields are hard to come by. 

The trouble is that it’s very hard to substantiate this factor, due to the secrecy that surrounds the Kingdom’s oil reserves.

“What we know about the Kingdom’s oil is pretty much what Saudi Aramco, the Petroleum Ministry, and the royal family want us to know,” writes Matthew R. Simmons in Twilight In The Desert: The Coming Saudi Oil Shock And The World Economy(New York: John Wiley& Sons (2005)-p.19. “The ‘known facts’ about Saudi Arabia’s oil, then, are few and simple. In 2004, ‘proven oil reserves’ totaled 259.4 billion barrels, plus another 2.5 billion barrels in the Saudi-Kuwait neutral zone. If these proven reserve numbers are real, it means that Saudi Arabia’s oil will last another 90 years at the current production barrels per day.”

Adding to the secrecy surrounding Saudi reserves is persistent inconsistency of oil production data published by different agency. “There is a persistent lack of close agreement among estimates made by Saudi Aramco, the International Agency, the U.S. EIA/DOE and BP’s annual Statistical Review of World Energy of the amount of Saudi Arabian oil produced each year from 1988 to 2004,” continues Matthew R. Simmons.“The variances between these sources highlight the uncertainty about the volume of oil that Saudi Arabia produces (p.88).”

While only time will tell how long Saudi Arabia has before running out of oil, Saudi output cuts will stabilize oil prices in the $50 to $60 range, provided that the world economy grows fast enough to absorb the added supply that will come from American frackers.


11 Comments on "Saudi Arabia Will Continue To Cut Oil Output For Months And Years …"

  1. dave thompson on Tue, 31st Jan 2017 4:32 pm 

    At $50 to $60 I do not see fracking coming back into play.

  2. penury on Tue, 31st Jan 2017 8:17 pm 

    Yes SA in common with all producing nations will be cutting production perhaps for years. We used to call that depletion.

  3. joe on Wed, 1st Feb 2017 3:14 am 

    They have to conceal it as market forces. If ever the day comes when they admit peak oil, the capitalist world will stop the next day.
    Abiotic or not, replenishment rates cannot match growth rates. Depletion of supply of easy oil is happening. If it weren’t we wouldn’t bother with tight oil.

  4. twocats on Wed, 1st Feb 2017 8:17 am 

    fracking is already back. oil and drill rigs have been increasing for months and US production is up.

  5. rockman on Wed, 1st Feb 2017 1:11 pm 

    P – Exactly…depletion can look like voluntary reduction when experienced. Add that to the story of taxing their citizerns because of a revenue shortfall: in the last 10 years there were two periods when KSA oil revenue fell slightly lower then its current yet no talk back then about pulling taxes out of the public. Perhaps weening their folks in preparation for the future.

  6. BobInget on Wed, 1st Feb 2017 1:36 pm 

    Agreeing w/ Thomson. ONLY the Permian remains
    Profitable under a SUSTAINED $55.00

    He’s also correct on falling US production.
    Two of the biggest problems should be GOM
    and Alaska. Both down notably.

    My biggest concern, we are being led willingly
    up (or down, I never remember which) a garden path when it comes to imports. Last week we imported at least 6% more then last year this time. (over 8 M B p/d)

    Exaggerated imports keep crude prices in check and cover-up depleted domestic production.

    The remainder of this post is conjecture and political. So, Republicans stop reading here.

    1) Everything is about oil.

    2) V. Putin wants (needs) to control oil pricing.
    (51% of income )

    3) President T greatly admires strong men Putin and Bebi but also strongly pro fossil fuel oil.
    (understands value)

    4) The only other world leader President T seems drawn , Israel’s Bibi Netanyahu.

    5) Both Israel and Trumpeters have show antipathy (to say the least) to Iran’s multi nation nuclear agreement reached last year.

    6) Last week Israel called for sanctions to be replaced on Iran. (they tested a new missile and in doing so, also tested a new President)
    (near silence from the Trump White house could be ominous were it not for the fact that they were busy cutting up the constitution)

    7) If President T gets clearance from President
    P, Israel can proceed to bomb Iran on pretext of building a missile capable of launching a nuclear weapon. (forbidden by the nuclear agreement)

    8) Needless to say, Iran will retaliate attempting to destroy Israel unless the US intercedes or participates in combined airstrikes .

    9) President Putin double crosses President T and fails to join in the fun,.Instead, eliminates Iran, crippling the US making Russia Big Kahuna of oil for China, India and what remains of the West.

    DJT, President for life. His, yours and mine.

  7. Davy on Wed, 1st Feb 2017 1:46 pm 

    A might bit dramatic as usual bob. Trump has lots to do and I am sure he is thinking like Lincoln once said “one War at a time” when faced with England upset over the removal of two confederates from their ship on the high seas. He of course let them go. Trump is up to his armpit in Alligators. He has lots to do and war with Iran is surely not high on his list.

  8. BobInget on Wed, 1st Feb 2017 3:38 pm 

    “Putting Iran in it’s place” is however high on Israel’s list. One needs only to Google
    “Israeli airstrikes on Iran” or “Will Israel strike Iran”. Articles go back over ten years.

    Did I mention today ? Iran and Saudi Arabia are at war over Islamic leadership.

    Israel and Syria are in a declared war.
    Syria is a client state of Russia.
    Russia, Putin, are famously anti Semitic, anti Israel, pro Assad, anti Muslim.

    The fact that anti Israel, anti US, Putin is conning our new inexperienced President with
    flattery, perhaps blackmail , should be obvious .

    BTW the Russian IT Newspaper guy who spilled Trump beans to that British spy, has been charged with treason. (if he’s still alive)

    (it’s always in the cover-up, isn’t it)

    Come on CIA, do your jobs, before they kill us all.

  9. Davy on Wed, 1st Feb 2017 5:04 pm 

    Wow, listen to bob, he has it all figured out.

  10. twocats on Wed, 1st Feb 2017 8:30 pm 

    You are trying to see the forest from the moon. Short term trend is three months of increased production after bottoming out in September, with just a modest rise in price. Low prices are not that stifling to production, at least until someone’s finger cramps from holding down that “zero” button on the computer that is generating all the money.

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