Monday, November 9, 2009

Saudi Arabian oil production, OPEC cuts and IEA estimates

It appears that the world economy has started into a slightly more significant phase of growth, at least according to Saudi Arabia. When the recession hit, in order to control prices and maintain at least a semblance of their income, the nations of OPEC instituted a cut in supplies, initially of just over 2 mbd and then, last December again, to a total of 4.2 mbd, that ate up what would have been a global surplus of oil. In that way prices could be brought back to the $65 to $80 dollar range that OPEC prefers.

Over the past few months, as the economy has improved, and oil prices began to move up again, so there has been a gradual slippage in the rigidity with which the supply was curtailed. In the first half of the year, overall the EIA estimated that OPEC was supplying some 28.7 mbd, which it reported as being some 2.6 mbd less than a year earlier. Of those sticking to the OPEC targets, Saudi Arabia has been the most rigorous. Given that it also supplies the greatest amount of crude of the OPEC nations, this also, more than other nation’s restrictions meant that the world supply could be set in balance with the perceived demand, and price controls could be maintained.

In June OPEC reiterated their position that supplies would be restricted, despite future price rises, until the existing global surplus was drawn down. However there was a report, in April, that part of the reason for Saudi’s adherence to policy might have been caused by an inability to sell more than 7.89 mbd.

The question of Saudi capabilities has been a topic of conversation ever since Matt Simmons wrote “ Twilight in the Desert,” yet if one looks at the EIA figures for crude production, Saudi Arabia had a peak in production of 9.7 mbd in July 2008, but had cut back production this year to an average (over the first seven months of the year) of 8.2 mbd, although by July they had increased back to 8.58 mbd, from a low of 8.086 mbd in February. However part of this increase is due to an increase in internal consumption, shown by the relative plot from Energy Export Databrowser. (which includes more than just the crude and distillate that the EIA counts).

Saudi Arabian oil production (Energy Export Databrowser)

The kingdom is uncomfortably aware of this burgeoning demand, and is already seeking ways to provide internal power by other means . Part of the problem has been that they have relied on natural gas to provide much of their internal power, but have discovered that in cutting back on oil production, they have also restricted the amount of natural gas produced. Which might explain their recent request that nations of the world might have to pay extra even when they don’t buy as much oil as they used to.

But those days, already seem to have passed and now, perhaps in order not to let prices start to rise too much, as the global economy appears to be regenerating and demand grows, Saudi Arabia has recognized that it can continue to increase the amount that it itself supplies, without threatening the overall price levels that have now been reached.

The amounts being made available do not fully relax the cuts that Saudi has made in production but nevertheless the removal of some restriction recognizes the change.
one Asian customer expected to receive full contracted volume for the first time in a year . . . . other lifters of crude from the world's biggest oil exporter expected steady supplies for December compared with November and most were still receiving much less than maximum levels.
"It's between 5 and 10 percent more," one source said, with reference to supplies to global firms for December compared with November.
"But we're still nowhere near the level at which we were."
So far OPEC is producing within the constraints that keep market price stable, with varying degrees of compliance to the overall target. However global demand can be anticipated to continue to grow as the effect on demand from the recession fade. China, for example, has just signaled its intent to buy around 1 mbd from Saudi Arabia next year.

The question will then come, as the available spare capacity in OPEC starts to diminish, how quickly will this impact overall price levels. One can envisage there being enough oil still in the pot that supply can meet demand through next year, but prices may rise a little in that time frame.

What happens beyond that? Well that’s where it gets interesting, and the reports that Western estimates of reserves may have been overinflated due to political pressure don’t help build confidence that all we will need to do is tighten our belts a little. And unfortunately that realization may arrive just in time for the next Presidential election.

However the IEA World Energy Outlook (WEO) is due out tomorrow, and it will be interesting to see what the actual predictions are that the IEA (a recently more cautious Agency than the EIA) are actually producing. There have already been stories, which I commented on last week that the IEA were cutting their projections of demand. The question then arises as to how they will address the potential of OPEC to meet even that limited demand.

Oh, and one last thing, I just got around to checking on what was happening with the Arthur Berman situation, and I may be one of the last to find out that the World Oil Editor was fired over the same situation. Boy! Somebody must have trod on some sensitive corns.

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