Saudi oil sup­ply to be put to the test

Stamford Advocate (Sunday) - - Business -

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. Vi­ennabased 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.

As­so­ci­ated Press file photo

A Saudi man pays af­ter fu­el­ing his ve­hi­cle at a gaso­line sta­tion in Riyadh, Saudi Ara­bia.

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