The Saudis Won't Prevent The Next Oil Shock
The increase, if it can be pulled off, would be an incredibly rapid ramp up in output, up more than 1 million barrels per day (mb/d) from May levels.
How this plan fits into the latest OPEC+ deal remains to be seen. It was only a few days ago that Saudi Arabia and its coalition partners said that they would add 1 mb/d of supply back onto the market, with many of them acknowledging that, in reality, the figures would be closer to 600,000 bpd because of the inability of so many producers to ratchet up output.
As such, the addition of 1 mb/d from Saudi Arabia alone would lead to the OPEC+ group exceeding the production levels they just committed to, after factoring in additions from Russia and other Gulf States.
However, the surge in output does not need to exported, at least not right away. Saudi Arabia could divert extra barrels into storage. Moreover, higher output is needed during summer months anyway because the country burns oil for electricity, which spikes amid hot summer temperatures. So some of the extra production will be consumed domestically.
Still, an industry source told Reuters that the increase in output "will go to the market," although the details are unclear. Bloomberg reports that shipments from Saudi Arabia to Aramco's overseas storage facility in Egypt have already been on the rise this month.
"We already mobilized the Aramco machinery, before coming to Vienna," Saudi oil minister Khalid al-Falih said over the weekend.
The dramatic ramp up in production suggests that Riyadh wants to prevent prices from rising too much. Producing at 11 mb/d will help offset the outages in Libya, Venezuela, Nigeria, Canada and Iran, but it might not be enough. The U.S. State Department said on Tuesday that Washington would take a hardline towards countries importing Iranian oil. The Trump administration expects countries to zero out Iranian oil imports by November 4, and the State Department said it would be unlikely that anyone would be granted a waiver.
That raises the odds of a much more serious outage from Iran than previously expected. Some analysts put the potential outage at 1 mb/d or more. If the U.S. is successful at convincing most countries to stop buying oil from Iran, the outages could rise to as high as 2 mb/d, although that remains speculation.
In another sign of how unpredictable the oil market has become, Kazakhstan lost 240,000 bpd this week, due to an unknown cause.
In this context, Saudi Arabia producing at 11 mb/d is probably needed, and it still might not be enough.
Worse, ramping up to 11 mb/d significantly cuts into available spare capacity. Estimates vary, but Saudi Arabia may have the ability to produce as much as 12.5 mb/d, although perhaps less. That means producing at 11 mb/d leaves only up to 1.5 mb/d of spare capacity. Add in smaller contributions from elsewhere and global spare capacity might only amount to 2 mb/d of supply as of July, or only about 2 percent of total global production. That would be down from about 3.0 to 3.5 mb/d up until recently.
"It basically leaves us with no spare capacity, at a time when Iran isn't the only issue," Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said in a Bloomberg television interview. "Venezuelan production's falling, Angola, Libya, Nigeria --there are lots and lots of issues everywhere in the world."
Unless demand falls back, or some of these outages dissipate, oil prices could be heading much higher.
Link to original article
NOT AN INVESTMENT ADVISOR. Oilprice.com is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.
RISK OF INVESTING. Investing is inherently risky. While a potential for rewards exists, by investing, you are putting yourself at risk. You must be aware of the risks and be willing to accept them in order to invest in any type of security. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell securities.
RISK OF BIAS. We often own shares in the companies we feature. For those reasons, please be aware that we are extremely bias in regards to the companies we write about and feature in our newsletter and on our website.
|Home :: Archives :: Contact||
April 2nd, 2020
© 2020 321energy.com