How Much Oil Can Saudis Really Pump? We're Set to Find Out



How Much Oil Can Saudis Really Pump? We're Set to Find Out
Does Saudi Arabia have the extra oil?

(Bloomberg) -- Does Saudi Arabia have the extra oil?

For the first time since Saddam Hussein invaded Kuwait in 1990, Saudi Arabia could face the ultimate petroleum test: pushing its complex network of oilfields, processing plants, pipelines, tank farms and export terminals to the limit, pumping every possible barrel of oil.

Today another Middle East crisis is stretching the Saudi oil machine. U.S. sanctions on Iran are crippling exports from the Islamic Republic, prompting buyers to look to the world’s largest exporter for replacement barrels.

In a pithy description of its role during a supply crisis, Majid Al-Moneef, a former Saudi senior oil official, told U.S. lawmakers a few years back that "Saudi Arabia is the ‘Federal Reserve of oil,’" according to American intelligence cables published by Wikileaks. 

Yet, unlike a central bank, the Saudis can’t print unlimited amounts of money. Their crisis-fighting tool is finite: a buffer of wells sitting idle in the desert. Use them now, and there’s nothing left for the next crisis.

"Any unforeseen outages such as those from Libya, Venezuela or elsewhere could potentially expose the lack of OPEC’s spare capacity -- particularly of Saudi Arabia," said Abhishek Deshpande, an oil analyst at JPMorgan Chase & Co.  

The Saudis and their OPEC allies seem aware that using their spare capacity is a now a double-edged sword: it may cool down prices, but the impact could be limited by the risk-premium as the market worries about what’s left. Oil’s already passed the $80 mark despite assurances from Riyadh and its allies that it can fill Iran’s gap. Some traders are predicting oil could reach $100 this winter as the impact of sanctions ratchets up.

The United Arab Emirates’s energy minister, Suhail Al-Mazrouei, told reporters last week the cartel had to be cautious and not "overuse" its limited buffer.

OPEC’s current spare capacity is relatively thin. The U.S. Energy Information Administration, puts it at just 1.4 million barrels a day, and estimates that it will drop to 1.2 million by late 2019, one of the lowest levels on record and similar to 2008 when oil prices zoomed to $150 a barrel.

Nonetheless, Riyadh says there’s lots of extra oil at hand. Energy Minister Khalid Al-Falih last week said more barrels can flow "within days and weeks." Officially, the kingdom claims to be able to pump at a maximum of 12.5 million barrels a day, up from a near-record 10.4 million produced in August -- spare capacity of more than 2 million barrels.

Demand for Saudi crude in October could range from 10.5 million to 10.6 million barrels a day, and the kingdom is able to supply this, Al-Falih told reporters in Algiers on Sep. 23. Vienna-based consultant JBC Energy GmbH pegged the country’s daily output at 10.6 million barrels this month, in a note published on Friday.

Before the sanctions were announced in May, Iran was exporting between 2.5 million and 2.8 million barrels a day. By the time the sanctions take effect in November sales may drop to just 1 million barrels, far lower than anticipated. On paper, the Saudis should be able to fill the 1.5 million to 1.8 million gap -- but only just.  

"The market is discovering that margins are not so high," Patrick Pouyanne, the head of French oil giant Total SA, said in an interview.

The energy industry is increasingly worried. The angst was evident at the annual Asia Pacific Petroleum Conference -- one of the biggest annual gatherings of the oil-trading industry -- this week in Singapore. In client meetings, conferences and the round of evening cocktail parties, executives were privately doubtful the Saudis can quickly lift output beyond 11 million to 11.5 million barrels a day -- not enough to replace Iran.


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