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Saudi energy minister says oil glut has vanished

Saudi energy minister says oil glut has vanished thumbnail

Saudi Arabia’s new energy minister said the supply glut that kindled a crippling oil rout around the world and thrashed Houston’s biggest business for two years has finally vanished.

“We are out of it,” Khalid Al-Falih said in his first newspaper interview since his rise to the most powerful job in the global energy industry last month. “The oversupply has disappeared. We just have to carry the overhang of inventory for a while until the system works it out.”

Falih, Texas A&M University graduate and former Saudi Aramco chief executive, replaced the long-time Saudi oil policymaker Ali al-Naimi in May. He was in Houston this week to visit Saudi Aramco operations here and later joined in an evening meal to break the Ramadan fast at Houston’s Museum of Fine Arts.

Two years and day after U.S. oil price peaked at $107 barrel, he sketched out the end of the world’s oil surplus and the beginning of a new chapter in the cyclical energy business in an exclusive interview with the Houston Chronicle.

Prices tumbled as low as $26 a barrel in February in the biggest oil-market crash since the 1980’s. Texas alone has lost 100,000 jobs since the slide in prices began in the summer of 2014. But countries like India and parts of Asia have a bigger appetite for oil now, Falih said, while crude production in the United States, Nigeria and other regions has fallen, closing the 1 million-barrel a day gap between supply and demand.

The first phase of a long-anticipated industry recovery is underway as refineries on the Gulf Coast and around the world work through storage tanks of crude oil. The United States has a near-record stockpile of more than 530 million barrels, which could take months to cut down.

“The question now is how fast you will work off the global inventory overhang,” said Falih, who serves as chairman of Saudi Aramco, the company that produces one out of eight barrels of oil the world consumes every day. “That will remain to put a cap on the rate at which oil prices recover. We just have to wait for the second half of the year and next year to see how that works out.”

Boom and busts

In the first half of the decade, shale drillers in Texas and North Dakota put fracking in the nation’s lexicon and led the United States to its biggest oil boom since the 1970s. But oil markets eventually became overstuffed as producers pumped more than 1 million barrels than the world needed each day.

For Saudi Arabia and other OPEC nations, the surge in U.S. oil production proved shale drillers could respond faster to high crude prices than all but the lowest-cost producers – “a game-changer,” Falih said, in the way the Organization of Petroleum Exporting Countries manages oil markets. Since November 2014, Saudi Arabia has refused calls by other OPEC nations to resume its role as the world’s swing producer and cut its oil production in a bid to stabilize falling crude prices.

“The tools that OPEC has used in the past – targeting specific prices – have not always worked in the long term,” Falih said. “They create market dislocations that ultimately hurt producers and consumers.”

The Kingdom, which can profit off of oil even at low prices, opted to let market forces weed out higher-cost producers. U.S. oil production, driven by higher-cost shale plays, has dropped by more than half a million barrels a day since early 2015 and nearly 80 drillers have gone bankrupt.”No matter what we do, ultimately markets win,” Falih said.

“Not Afraid”

Saudi Arabia’s financial reserves have also declined as it collects less oil revenue, but it’s in better shape than many of its rivals. The government is planning a series of reforms and investments to expand other parts of its economy outside of oil production, including tourism, services, mining, petrochemicals, even renewable energy.

One goal of the plan, which Saudi officials call Saudi Vision 2030, is to bring its non-oil exports up from 16 percent to half of the exports it offers the world over the next decade. Deputy Crown Prince Mohammad bid Salman has said the Kingdom is striving to be able to live without oil by 2020 – a mere four years. The comment “impress on the urgency that this needs to happen quickly and it needs to happen now,” Falih said.

“But nobody has the intention of turning off the oil economy in Saudi Arabia,” Falih said. “We’re trying to build it up. But what we hope while we’re doing this is the non-oil economy will grow even faster.”

It’s a big play for the world’s biggest oil producing country and some observers of the closely guarded Kingdom have wondered if it reflects anxiety over the possibility the world’s oil and gas demand will eventually peak amid global efforts to limit rising temperatures by moving the world from combustion engines to electric vehicles – making the Kingdom’s number one export a relic of a bygone age.

Some industry players, including major oil companies like Statoil,believe it will take much more than the Paris climate accords signed last year to thwart the worst effects of climate change, including much tighter emissions rules for vehicles and massive growth of solar and wind power in electricity generation and a sharp reduction in coal production.

Still investing

But Al-Falih said Saudi Aramco is still investing heavily in maintaining the Kingdom’s capacity of 12.5 million barrels a day because Saudi officials believe global economic growth will continue to support rising energy demand of about 1.5 million barrels a day annually.

Even as it pumps 10 million barrels of crude a day, he said, the world’s largest oil company is working to offset natural declines in its spare oil production capacity so it’s ready to meet demand if supplies drop somewhere else in the world.

That’s because Saudi Arabia, he said, isn’t too worried about big changes in the world’s energy mix. Unlike quickly evolving information technology, global energy systems take decades to build, and while the Kingdom plans to invest in renewable energy resources, it also recognizes “any transition is going to take decades.”

“We’re going to invest in making it happen. We’re not afraid of it, but we’re also realists and we know that oil will be a significant part of the energy mix for decades to come,” Falih said. “Even if the share of oil goes down from, say, 30 to 25 percent, 25 percent of a much bigger global demand means a much higher absolute number of barrels that will be in demand by 2030 or 2040.”

So while electric vehicles could one day make serious inroads in transportation, because of sheer demographic and economic growth in coming years, “we believe overall demand for petroleum in transportation and petrochemicals is going to rise for a long time before it starts falling in absolute numbers. Yes, we know it will fall in percentage terms – but very gradually.”

Chron



24 Comments on "Saudi energy minister says oil glut has vanished"

  1. Apneaman on Wed, 22nd Jun 2016 3:12 pm 

    Alas, life no longer has meaning for the one they call planty.

  2. Anonymous on Wed, 22nd Jun 2016 3:29 pm 

    Yea, who’s gonna tell him the king salmon, I mean oil glut is done. Now he will have to go back to blaming the obomber ‘administration’ for things like the Earth’s movement around the sun, and whatnot. Least he has something to fall back on now the ‘glut’ has been officially declared a dead horse he can no longer flog.

    cheeerz

  3. shortonoil on Wed, 22nd Jun 2016 3:52 pm 

    “Saudi Arabia’s new energy minister said the supply glut that kindled a crippling oil rout around the world and thrashed Houston’s biggest business for two years has finally vanished. “

    Well, well the new Saudi Oil Minister can’t read a graph.

    click “Total Crude Oil & Petroleum Products
    then
    click graph
    http://www.eia.gov/dnav/pet/pet_stoc_wstk_dcu_nus_w.htm

    “The United States has a near-record stockpile of more than 530 million barrels, which could take months to cut down.”

    It took almost fours years to build that inventory “overhang” but it is going to go away in months. How convenient. That could happen if Iran nukes Saudi Arabia.

    This sounds more like a sales pitch to sell 70 year old pumped out fields. Was this guy selling used cars before he took this job? “For sale, nice oil fields, only worked on Sunday, (or was that Saturday)”

  4. dissident on Wed, 22nd Jun 2016 4:32 pm 

    It never existed as a “glut”. There was a transient excess capacity due to a global recession driven fall in demand. Now even this delta in supply vs demand has disappeared.

    All the yapping about $10 oil was so much retarded nonsense.

  5. Plantagenet on Wed, 22nd Jun 2016 5:19 pm 

    Gosh this place is fun.

    Apey, anonymous, dissident and the other folks who spent the last two years arguing the world was not in an oil glut are now completely confused….they can’t understand this new idea at all—can an oil glut ever be “over” for people who are so slow they never comprehended that the world was in an oil glut in the first place????

    Hahahahahahah!

    Cheers!

  6. Apneaman on Wed, 22nd Jun 2016 6:01 pm 

    planty, I’m sorry you are experiencing your feminineitchhygiene issue yet again. Try not to let it get the best of you.

  7. Don Stewart on Wed, 22nd Jun 2016 7:47 pm 

    I’m going to post this here, although it is off-topic. I suspect many readers of this blog are just a wee bit worried about what the future may bring. It turns out that pre and pro biotics can help lower the stress hormones….Don Stewart

    From David Perlmutter, MD
    You’ve heard of the term probiotics, and likely prebiotics as well, but now we are hearing about “psychobiotics.” These have been defined as:

    living organisms that, when ingested in adequate amounts, produces a health benefit in patients suffering from psychiatric illness.

    That’s a pretty impressive new term, and claim for that matter. But the reason that scientists have developed this terminology is because new research clearly demonstrates that certain probiotic organisms have a dramatic effect on regulating mood.

    In recent double-blind, placebo-controlled, randomized trials, it has been demonstrated that people taking a combination of two fairly common probiotic bacteria, including lactobacillus helveticus and bifidobacterium longum, had a dramatic reduction in their level of psychological stress as compared to people given a placebo. In addition, researchers demonstrated that the level of cortisol, the so-called “stress hormone”, was much lower in those receiving these probiotics as opposed to those who received placebo.

    We know that certain probiotic bacteria have an effect on the level of various neurotransmitters that can affect mood, like serotonin and dopamine. In addition, inflammation is a cornerstone of depression and current research clearly identifies the stability of the bowel lining as a regulator of inflammation, throughout the body. This stability is regulated to a significant degree by the level of good bacteria living within the intestines.

    These are just two proposed mechanisms whereby specific probiotic bacteria can affect mood.

    That said, well beyond just the idea of intervening with probiotic supplements as an attempt to help with mood, an important take-home message from this research should be that we should do everything we can to preserve and protect our gut a bacteria today by reassessing our food and medication choices, as well as various other lifestyle factors like sleep, stress, and exercise. It makes sense that if we compromise the levels of these and other probiotic bacterial species within us, it may well pave the way for debilitating mood disorders.

    a link:

    http://link.springer.com/article/10.1007%2Fs00213-014-3810-0

  8. Don Stewart on Wed, 22nd Jun 2016 7:51 pm 

    I should add something. Separately I posted on the amazing increase in energy per gene which eukaryotes achieved subsequent to the endosymbiosis with mitochondria. Which makes the bacteria look like a poor relation. But the bacteria are the undisputed champions when it comes to metabolic processes. They can take ANYTHING apart, while humans can’t even properly digest an ear of corn. We humans have more bacterial DNA in us than human DNA.

    So some respect is warranted….Don Stewart

  9. yoshua on Wed, 22nd Jun 2016 8:32 pm 

    “Deputy Crown Prince Mohammad bid Salman has said the Kingdom is striving to be able to live without oil by 2020 – a mere four years. The comment “impress on the urgency that this needs to happen quickly and it needs to happen now,” Falih said.”

    Sounds as if the Saudis are saying that they are reaching the end. The production will start to decline in 4 years and then they have another decade before the reserves are more or less depleted.

  10. dooma on Thu, 23rd Jun 2016 12:45 am 

    Ap, what about when Obama goes at the end of the year?

    I could swear that there is a custom made “Obama” key on Planty’s keyboard.

  11. dooma on Thu, 23rd Jun 2016 1:06 am 

    I agree with yoshua. Perhaps There is going to be a nasty surprise due to a fact that the KSA has pumped a shipload (or two) of oil but according to them-reserves are doing just fine.

    When they start talking about tourism, you know that something is rotten in the state of Denmark.

  12. MSN Fanboy on Thu, 23rd Jun 2016 2:54 am 

    EU Referendum today!
    (In response to Davy)

    Davy, it does not really matter if we stay or go, long term were all fucked 🙂

    However, Unfortunately we should stay and we will, fear of “the unknown” will mean we remain.

    Britain is a cucked nation… sorry i meant culturally enriched nation. (PC S

  13. MSN Fanboy on Thu, 23rd Jun 2016 3:04 am 

    That was odd.

    Anyhow, All modern Britain does now is housing, fiance and public sector work. All other industries serve the above three here.

    If we leave we may find it harder to find suckers to roll over our debts again and the party may stop + we will be blamed for the inevitable real great depression 2.0.

    I will vote remain, just to extend BAU a little longer, i figure, the further we go down this industrial pollution hole the better the correction will be when we finally come to a stop!

    I just want to make sure that our greed and avarice permanently kills of any civilization as arrogant as our arising again. Every year BAU chugs along, is another year we postpone the demise at the price of more pollution, so when it does come for its ending the piper to be paid

    AND THE PIPER WILL BE PAID – VOTE IN TO MAKE SURE THE PIPER KILLS MOST OF US!

    There we go Davy

  14. Davy on Thu, 23rd Jun 2016 6:38 am 

    MSM, I kind of like the disruptive aspect of you guys leaving but I see your point.

  15. oracle on Thu, 23rd Jun 2016 6:55 am 

    Since comments are closed for this post http://peakoil.com/publicpolicy/the-humanity-party, I’m posting here.

    Simply, read some Tolstoy. Keep reading until you understand what he means by the violence of the pagan way of life, a way we desperately cling to. Then you will be ready to let go. A lot of today’s problems then become irrelevant.

  16. oracle on Thu, 23rd Jun 2016 7:06 am 

    MSN, Davy: For Britian, both staying and leaving are both the wrong way to go.

  17. PracticalMaina on Thu, 23rd Jun 2016 8:45 am 

    Yeah, no more spare oil anywhere, in unrelated news, we need more money per barrel so we can bomb the hell outta the neighbors some more.

  18. shortonoil on Thu, 23rd Jun 2016 8:49 am 

    “Sounds as if the Saudis are saying that they are reaching the end. The production will start to decline in 4 years and then they have another decade before the reserves are more or less depleted. “

    The Saudis are now in the same position as is all the oil producing states. Their cost of production is higher than the price that they are receiving. As we have previously mentioned the extraction portion of the industry lost $2.3 trillion in 2015. The processing and distribution portion of the industry is now subsidizing the extraction portion for the integrated oil companies. The cost of the crude as a percentage of the price of gasoline has fallen from its 100 year historical average of 71% to 49% at present. The downstream portion of the integrated industry is now covering part of its losses from the extraction portion by passing those costs on to the consumer. Producers of crude only are not in a position to pass their losses on to some other sector of their business. Producers of only straight crude like, Venezuela, Nigeria, and Canada are going broke.

    The Saudis are talking about moving their production into the finished products end of the business. Those areas are now dominated by the likes of EXXON, Total, and BP. It is not likely that they will be willingly to move over to allow space for the Saudis.

    As far as tourism – that’s a joke. One has live in a dessert, be a Muslim, and have an affinity for camels to appreciate it!

    http://www.thehillsgroup.org/

  19. rockman on Thu, 23rd Jun 2016 10:26 am 

    The US does not have 530 million bbls of “excess oil inventory”. According to the EIA

    https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WTESTUS1&f=W

    the current stockpile is 1.37 billion bbls. Before 2014 it held steady at 1.1 billion bbls for almost 4 years…during that record high price period. IOW the vast majority of the current volume is WORKING INVERNTORY which is required to maintain refining levels. Thus we have 270 million bbls above normal operating margins.

    Again according to the EIA US production declined 521,000 bopd from March 2014 thru March 2015. So in theory this excess could be depleted in 518 days. Of course that theory is complete bullshit. The US imported 8 million bopd last March so if we stopped importing oil those 270 million bbls would disappear in 34 days.

    That begs the question, doesn’t it: if the refiners can save themselves $13.5 BILLION by not importing those 8 million bopd then why aren’t they using those 270 million bbls of “inventory”? Maybe it’s because the refineries don’t own that oil. Perhaps most if not all is owned by speculators playing the contango angle and are waiting for higher prices to cash in their profits. Of course they need more then just a better price then what they paid originally since it costs to store that oil. And every month that passes eats into those profits. Like playing chicken in a car: the trick is to know when to flinch. LOL.

    The bottom line: the dynamics of oil prodution, purchasing, storage and refining oil is to complex to charactize by tossing out simple numbers like the “US excess oil inventory”…especially when that number is wrong by 100%. LOL.

  20. rockman on Thu, 23rd Jun 2016 10:49 am 

    “The Saudis are now in the same position as is all the oil producing states. Their cost of production is higher than the price that they are receiving.” Not even close to the truth. Which should be obvious: the KSA is not a charity running a negative cash flow for us oil consumers. LOL. Can’t get a number from them of course but guessing they are doing a tad better then US companies that are running $5 to $15 per bbl for lifting costs.

    OTOH if by production costs one means the cost to develop NEW WELLS that could be much higher. But again that begs the question: how much is the KSA (or any company) spending to drill new wells knowing they’ll lose money doing so? Doesn’t make much sense, does it?

    But there is one potential money losing aspect: projects that have already been developed that require a higher price to return a profit. Of course such money losers would still be produced if they delivered a positive cash flow.

    It really isn’t that difficult to understand as long as one DOESN’T assume the KSA or any other oil producer is still spending monies knowing those new investments will lose money. Or that the KSA is running a negative cash flow while depleting its finite reserves.

  21. shortonoil on Thu, 23rd Jun 2016 11:43 am 

    “Can’t get a number from them of course but guessing

    Sometimes that method works, sometimes it doesn’t!

  22. jjhman on Thu, 23rd Jun 2016 1:36 pm 

    I’ve been suspicious of Saudi intent from the moment I heard that they were willing to sell even a tiny portion of ARAMCO. Who in their right mind would sell any particle of their major source of income when they have virtually no other potential sources?

    So that offer looks very much to me like the guy selling the car with a salvage title: For sale excellent condition, needs minor work.

  23. rockman on Thu, 23rd Jun 2016 3:43 pm 

    JJ – “Who in their right mind would sell any particle of their major source of income when they have virtually no other potential sources?” Easy answer for the Rockman: I’ve seen it done a hundred of times in last 40 years. I see it happening many dozens of times right now. In fact a big part of my job now is evaluating such OPPORTUNITIES. These are opportunities to buy reserves at a discount. So the question you asked: why would a company sell a portion of itself for less then it’s worth? Ask the other side of the question: why would the Rockman (or any other company) pay what that portion is worth leaving me no profit? IOW if you plan to sell widgets for $1 each would you pay the widget maker $1 for each of them? Same thing…reverse the question: if you had a warehouse with $100 million in widgets and you knew the retailer could only sell them for $1 each what would you offer potential buyers? If you tell them $1 each how many are you going to sell?

    This is how the real commodity world works: it cost you 90¢ to make each widget. But you can only sell 10% of your inventory for 95¢. So you left with $90 million of widgets in your warehouse. But at 75¢ per widget you can sell them all. So in order to pay you debt and keep the doors open you sell that remaining 90% of your widgets for 5¢ less then your production cost.

    It’s called “monetizing assets”. MA has been a common practice in the oil patch since its very beginning. Owning $100 billion of oil reserves IN THE GROUND is worthless. Producing and selling $100 billion of those reserves makes you $100 billion…but only in the future when you produce that oil. But selling $15 billion of that future production for $12 billion puts cash in your pocket right now. So again ask the other sided of the trade: would you pay the KSA $15 billion for that piece of ARAMCO if you thought you would only get $15 billion back?

    It’s how any oil reserves are bought: you build in a time factored discount rate to calculate the Net Present Value. You will never pay 100% of the future revenue.

    But the ARAMCO stock is much riskier IMHO. All you actually own is a piece of paper. And there’s no certainty what dividend you might get since you are a very minor shareholder with no voice on the board and no certainty of what you could sell you stock for in the future.

    And this us why I’m a tad suspicious of the ARAMCO offering. There are other ways to monitize future revenue then selling assets. You can use those assets to back up a bond offering. You get the cash now and just pay the interest and keep 100% of the company. So the question: why isn’t the KSA doing that instead of selling off a piece of the company at a discount? Could it be that they expect the future value of ARAMCO stock to fall significantly? Especially if the plan to pay insignificant dividends…or none at all. And thus be able to buy it back on the cheap? Like Big Oil has been doing with its stock for a while. Some of the cheapest oil reserves Big Oil has been adding to its books is buying its own stock. Not uncommon to be cheaper then drilling for them.

  24. shortonoil on Thu, 23rd Jun 2016 8:43 pm 

    “I’ve been suspicious of Saudi intent from the moment I heard that they were willing to sell even a tiny portion of ARAMCO.”

    If ARAMACO is worth $2 trillion (they appear to be asking much more than that for it) and it was depreciated out over 20 years (optimistic) that would put their cost of depreciation for 10 mb/d in production equal at $27.40 per barrel. At $50 ARAMACO can’t afford to sell oil without eventually going broke. The Saudis, like every other oil producer without direct access to the end user market, are now in trouble. EXXON saw its profits drop by 50% in 2015; Chevron saw theirs fall by 90%. The price of WTI in 2015 was $48.67. EXXON and Chevron are companies with direct access to the end market. The cost of the crude to produce gasoline has fallen from it 50 year historical average of 71% to 49% in 2015. The integrated companies are passing on some of their increased extraction cost to the end user. The Saudis have no means of doing that.

    What we are, and will be hearing out of the Saudis will be delaying tactics to keep the House of Saudi in power for as long as possible. Once their $750 billion dollar stash has been exhausted ARAMACO will disappear.

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