Is Saudi Arabia calling the market's bluff over oil?
Oil market
watchers have been keeping a close eye on Saudi Arabia ever since it
announced last month that it could very well increase oil production if
and when it wanted to, but analysts at Energy Aspects explained on
Tuesday that the major oil producer could be calling the market's bluff.
Saudi
Arabia threatened to boost its already record-breaking oil output
following the failure of a meeting of OPEC and non-OPEC producers in
Doha in April to discuss a possible freeze of global oil production at
current levels in an effort to support low oil prices.
The
talks failed, mainly after Iran said it would not participate in a
freeze, leading other Middle Eastern producers, such as Saudi Arabia, to
refuse to do so unilaterally. Following the failure, Saudi's Deputy
Crown Prince Mohammed bin Salman warned that the kingdom could immediately increase output by more than a million barrels a day to 11.5 million .
Saudi
Arabia is already widely blamed for a glut in supply in global oil
markets as it, and the wider OPEC group, decided in November 2014 to
defend its market share in the face of rival producers rather than to
support prices, leading to a global decline in oil prices.
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Oil prices
fell on that threat and while they have since rebounded on outages in
Canada and Nigeria, Saudi Arabia has been closely watched for any signs
it is actually preparing to ramp up production.
Changes at the top of Saudi's oil ministry
and industry have only heightened those expectations, including a
well-publicized IPO of its state oil company Saudi Aramco (whose Chief
Executive Amin Nasser suggested last week that the company was ready to
meet any call on it) and a replacement of its oil minister, with the
influential long-time oil minister Ali al-Naimi replaced by Aramco
chairman Khalid al-Falih.
Any
increase is unlikely to happen anytime soon though, according to
analysts at energy consultancy firm Energy Aspects, which published a
noted on Tuesday suggesting that there is no reason to fear an imminent
change of Saudi policy.
In
fact, Energy Aspects said that Saudi Arabia would not even be producing
its usual amount of around 10.2 million barrels a day (mb/d), according
to OPEC monthly reports, this month and was unlikely to reach a high of
12.5 mb/d – Saudi Arabia's reported full production capacity, according
to Saudi Aramco's Nasser – by the end of 2017.
"A
lot has been happening in the oil market lately. Yet, what has caught
everyone's attention amidst this drastic U-turn in balances is Saudi
Arabia. Undoubtedly these are uncertain times, but Saudi Arabia will not
be producing 11 mb/d this month (especially since it has maintenance)
and will not be reaching 12.5 mb/d by end-2017. Oil rigs have been
falling, and output has been remarkably steady at 10.2 mb/d since August
2015," Energy Aspects' team said in the note.
The research consultancy
also stated that any potential increase would not only take time, but
would need more oil infrastructure, such as oil rigs, and that markets
had generally jumped to conclusions about Saudi Arabia's oil output
plans.
"Moreover, Saudi
Arabia has made no announcements that it will increase productive
capacity. And while it would like to be prepared for a higher call on
its crude as non-OPEC supplies fall fast, increasing capacity takes
time. The 1.5 mb/d increase in productive capacity to 12.5 mb/d took six
years to complete, by 2010. Even increasing production and maintaining
it at 11 mb/d or higher needs more rigs, much like sustaining output at
10 mb/d required 20 more rigs," it said.
In
addition, Energy Aspects said that even the IPO of Saudi Aramco was
"fraught with challenges, and has hardly generated interest amongst
investors while several of the recent reforms may soon be reversed."
"Of
course, change is occurring, but the lack of institutional capacity to
undertake such deep reforms means it takes time to implement such
changes, and there will be plenty of obstacles along the way."
The
note blamed the media for its "perilous habit" of "boiling everything
down to a soundbite, hardly helps, with various comments, taken entirely
out of context, adding further fuel to the fire" and said that there
was nothing concrete to suggest oil output was about to rise.
It
said that a number of expectations about Saudi Arabia's oil strategy
were being based on assumptions and conjecture, rather than fact.
"Saudi
Arabia will not change its policy of accommodating others (but) it does
not mean (new energy minister) Al-Falih will purse the opposite policy
of increasing production to flood the market. He has even taken to
Twitter to reiterate that Saudi Arabia will continue with stable oil
policies — if only the market would listen."
Saudi's
former oil minister Al-Naimi once said that that "scenarios to raise
the country's oil production capacity to 15 mb/d had been studied and
could be set in motion if global demand required it", but again, Energy
Aspects said that there was no reason for Saudi Arabia not to make such
strategies clear and that as non-OPEC production fell, the call on OPEC
crude was likely to rise anyway.
"Undoubtedly,
Saudi Arabia would want the call on OPEC crude to become the call on
Saudi crude and to be ready to supply the market if there is demand. So,
the Kingdom may well look into raising capacity over time, but whenever
this happens, it will be driven by its expectations of demand — not to
prove a point and flood the market."
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