Spare Saudi capacity in focus as supply outages grow
THE DE FACTO OPEC LEADER WOULD BE RELUCTANT TO EXHAUST ITS SPARE CAPACITY
Saudi Arabia will be reluctant to exhaust its substantial spare capacity to offset shortfalls elsewhere in the market due to significant costs and risks involved, analysts said as pressure grows on the de facto Opec leader to further increase production to cool oil prices.
Saudi Arabia has a spare capacity of 2 million barrels per day which it will prudently use if and when necessary to ensure market stability and balance, King Salman Bin Abdul Aziz Al Saud told US president Donald Trump in a phone call last month.
“Saudi Arabia is bringing a lot of oil back to market and at this stage I think that’s the main thing keeping Brent in check. But I’d be very surprised to see them use up all their spare capacity. It’s what allows them to manage the market the way that they do and giving that up is giving up something that’s hugely important to them strategically,” Emma Richards, senior oil and gas analyst at BMI Research told Gulf News by email.
“They benefit from a higher oil price and as long as it’s not destroying demand, they’ll be happy to see prices rise a little higher.”
Apart from this, bringing all of Saudi Arabia’s spare capacity into production will not be easy and would involve significant costs and would take six to 12 months, analysts said.
Saudi Arabia increased its production to 10.42 million in June in line with the agreement reached between Opec and non-Opec members last month to cool oil prices to stabilise the markets. ■
Other countries in the group like the UAE and Kuwait also raised production as per the deal. The move comes after Trump criticised Opec in a series of tweets saying they are not doing enough to stabilise oil prices. “The Opec monopoly must remember that gas prices are up and they are doing little to help,” Trump said in a tweet on July 5.
Oil prices are currently trading higher due to growing demand
Emma Richards | Senior oil and gas analyst at BMI Research
and supply disruptions in Venezuela, Libya and Canada. The decision of president Trump to reimpose sanctions on Iran is also helping oil prices to move higher.
“It remains in our perspective that Saudi Arabia will increase its output albeit progressively. Riyadh will attempt to balance the equation between political influences from the US against its underlying interest with Aramco’s IPO,” said Benjamin Lu, commodities analyst from Phillip Futures in Singapore.
In a similar comment, Hussain Sayed, Chief Market Strategist, from FXTM said the US clearly wants to bring Iran’s exports down to zero by November, and given the current tight market conditions, Saudi oil production needs to be raised to unprecedented levels, along with other Opec producers, such as the UAE and Kuwait.
“I think Saudi Arabia is ready to pump more oil, the question is — how much can they pump? I don’t think an additional two million barrels per day is possible at the current stage as it requires time and investments to make such production sustainable. However, they will make all possible efforts to cover the shortfall elsewhere.”