Is the recent run-up in oil prices due in part to Saudis slashing production in March by over 800,000 barrels a day?
West Texas Intermediate crude oil price vs. year (2003 to present)
So the right-wing has gone from attacking Obama for supposedly bowing to the King of Saudi Arabia to attacking him for ignoring the Saudis and helping to ease out Mubarak. A Fox News story from February, “Saudis Warned Obama Not to ‘Humiliate’ Mubarak,” stated:
America’s closest ally in the Gulf made clear that the Egyptian president must be allowed to stay on to oversee the transition towards peaceful democracy and then leave with dignity.
“Mubarak and King Abdullah are not just allies, they are close friends, and the King is not about to see his friend cast aside and humiliated,” a senior source in the Saudi capital told The Times.
Yes, kind of odd for Fox News to stand with Saudi Arabia and against ousting dictators. Guess it’s that “enemy of my enemy” stuff.
More seriously, the falling out with the Saudis seems real. A Sunday WashPost op-ed, “Amid the Arab Spring, a U.S.-Saudi split,” by a senior fellow at the King Faisal Center for Research & Islamic Studies, calls it “a tectonic shift.” They don’t like our Obama’s pro-democracy moves in the MidEast: “With Iran working tirelessly to dominate the region, the Muslim Brotherhood rising in Egypt, there is simply too much at stake for the kingdom to rely on a security policy written in Washington.” So “The special relationship may never be the same.”
Presumably that mean the Saudis just aren’t into us and Obama anymore. Of course, you’d be hard-pressed to find lots of evidence of that special relationship in, say, their influence on oil prices in the past several years.
And if they are driving oil prices now to harm Obama, then one would have to conclude they really wanted to screw the Republicans and their old buddy George W. Bush when they let oil prices run up to almost $150 a barrel in mid-2008.
But what’s germane here is a too-little-covered story from Bloomberg in mid-April in which the Saudis said they slashed production in March:
Saudi Arabia’s Oil Minister Ali al- Naimi said the global “market is oversupplied” with crude even as the world’s largest oil producer cut output last month by more than 800,000 barrels a day.
“Our production in February was 9,125,100 barrels a day,” al-Naimi said, as he arrived in Kuwait for a conference.
“In March, it was 8,292,100 barrels. It will probably go a little higher in April. The reason I mention these numbers is to show you the market is oversupplied.” Saudi Arabia’s spare production capacity is about 3.5 million barrels a day, and its total capacity is 12.5 million barrels a day, he said today.
If true, this is a mini-bombshell story. But it didn’t get much coverage because it didn’t fit with the other narratives being offered for the recent run-up in prices — MidEast unrest, speculators, Obama’s supposed efforts to stifle drilling, which made the least sense since US oil production has risen sharply in the last two years:
The interesting thing about the Saudi claim is that the price of crude did begin its latest jump above $100 a barrel in late February, roughly coincidentally with the Saudi cuts.
Whether the Saudis are to be believed about the cut and their spare capacity is another matter. A May 11 news article in the Wall Street Journal, “OPEC’s Hot Summer May Get a Saudi Breather,” buys it:
The Saudis recently cut back their production after encountering little demand for their extra barrels.
According to the latest report by the International Energy Agency, effective OPEC spare capacity has fallen to 3.91 million barrels a day, compared to 5.47 million barrels a day one year earlier….
Forget last week’s oil-price correction. Failing a response from producers, such fundamentals could set the stage for a potential spike and collateral demand destruction.So if OPEC, as expected, decides not act as a group, Saudi Arabia, along with producers with spare capacity such as Kuwait and the United Arab Emirates, may take the matter into their hands and increase their own production unilaterally later this year.
But an April 27 WSJ commentary by James Herron, “Saudi Oil Production Doesn’t Add Up,” disputes it:
Some analysts claim that the increase in oil production Saudi officials promised in late February to compensate for lost Libyan supplies was fictitious. Statements from the Saudis themselves imply that the kingdom cut its production several weeks later much more sharply than reported. But either scenario contradicts previous statements from Saudi officials….
Shortly after the civil war in Libya erupted in February and halted much of the country’s 1.3 million barrels a day of oil production, Saudi Arabia promised to quickly fill the gap. On February 28 Saudi officials said they would raise production to 9 million barrels a day-swift action that reassured oil consumers that unrest in the region wouldn’t result in supply shortages.
However, Mr. Al-Naimi’s statement contradicts this version of events. According to him, Saudi Arabia was already producing an average of 9.125 million barrels a day in February, before the output hike in response to the situation in Libya.
So did the Saudis really pump more oil to make up for the loss of Libyan crude?
Analysts at Goldman Sachs and Barclays Capital say no. “They were producing at nine million barrels a day since November in response to the strength of demand,” said Barclays analyst Amrita Sen.
Goldman analysts said in a note: “While Saudi Arabia announced a boost to production to offset the [Libya] shortfalls, the production increase had likely already happened some time ago.”
… By crunching the numbers above, Saudi Arabia’s March production should have averaged around 9.4 million barrels a day. But Mr. Al-Naimi said it produced 8.3 million barrels a day in March. The only way you can get to Mr. Al-Naimi’s figure is to assume that in the second half of March the Saudis slashed production to just 7.0 million barrels a day. This is a level not seen since the 1990s and it is scarcely credible that Saudi Arabia would cut so deep at a time when oil demand is still growing and prices have been hitting two-and-a-half year highs. Independent estimates from the International Energy Agency and OPEC put Saudi Arabia’s production at 8.9 million barrels a day in March.
So what is going on?
The honest answer is that nobody knows right now.
And then we have Forbes’ Timothy Siegel in mid-April, “Why I think Saudi Oil Production is now at Capacity”
To me, it only makes sense, it only all fits together if the Saudis are hitting the wall predicted by [Matt] Simmons. It makes sense that if they were seeing declining production, they would lie about it 1) to avoid admitting that they have been lying all along and 2) to avoid spooking markets, which although it could yield a short term benefit in higher oil prices, would (in their view) get them quickly back to 1985 all over again. If they had excess capacity, they would follow their post 80’s philosophy and increase oil output. It just does not make sense to believe that they have excess production capacity but that it somehow does not fit with the worlds refining capacity. Because there is so much excess capacity in the worlds refineries, because there is a fair range of capabilities in that excess capacity and because if there was not enough refining capacity to handle all the sour crude that is available, the price of sour crude would be selling at a greater discount to sweet crude than the current modest discount.
Also, the Saudis are apparently changing their story. The International Energy Agency told a tale of production-refinery mismatch, now the Saudis are just saying that the world is “well-supplied.” High oil prices are due to other factors, they indicate. Well, the law of supply and demand has not been repealed. These high prices indicate that the world is not well supplied. I don’t believe that Saudi output fell by 800,000 barrels per day from February to March, but that they had some oil stored up, and could make a show of increased exports in February. But now, with the continuing Libyan crisis, they have exported their stores, they cannot continue at a higher level, and, I believe, they are forced to reduce exports.
And let’s not forget this WikiLeaks peak oil bombshell from February: “Saudi Arabian reserves overstated by 40%, global production plateau immiment.”
I agree that nobody knows exactly what is going on right now, especially in the short term, which no doubt is adding some sort of uncertainty premium to the price of oil.
But the medium- and long-term trend is up, up, up:
- Jeremy Grantham must-read, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”
- Science: “Peak oil production may already be here”
- Least surprising headline of the day: “Exxon Struggles To Find New Oil”
- World’s top energy economist warns peak oil threatens recovery, urges immediate action: “We have to leave oil before oil leaves us”
- German military study warns of peak oil crisis
- Peak oil production coming sooner than expected