Saudi oil production to stay high on US demand, Iran sanctions

March 18, 2012 1:53 pm

After the Saudi Arabian Monetary Agency (SAMA) vowed earlier this year to correct any imbalance in supply and demand, crude oil production capacity is currently in the region of 12.5 million bpd. While this figure may not be sustainable long term, an output sustained over 10 million bpd is anticipated, in part due to growing demand from the US.

“In terms of production, I think the Saudis can probably manage to produce at over 10 million bpd for quite some time,” says Katrina Dunkley, Senior Petroleum Analyst at FTI Consulting.

“That’s not say it doesn’t put strain on global spare capacity or the Saudi wells. The Saudis only have two major fields coming online through 2016. It is going to be difficult for the Kingdom to sustain total crude production capacity at the current levels of 12.5 million barrels if they are continually required to ramp up production and to cover supply losses.”

US to buy more Saudi oil, implications for Opec

Last week oil prices rose 2% on continued disputes over Iran’s nuclear program and a weaker dollar, and while Saudi Arabia still maintain a flexibility in their capacity, the US has more oil imports on order as of July. This is revenue for the kingdom but has wider implications, explains Dunkley:

“On the one hand, you have the United States, an ally, asking for increased supply to make up for lost Iranian barrels. This is the second time in two years the United States has asked the Saudis to boost supply. Of course the argument here is if the price rises further, it will cause a snapback to global recession which will hurt everybody.”

“One added dimension of the global picture is Opec as a cartel is facing what could be the beginning of an existential threat from North American tight oil production. There is a chorus of voices who believe that within the next five to ten years, Opec imports won’t even flow to the U.S Gulf Coast.”

The ramifications for Saudi Arabia are serious and also for what Opec calls ‘security of demand’. Dunkley’s view is that the kingdom has every incentive to keep oil prices high now, with the distinct possibility that shale oil could come on the scene and cause prices to be slashed. However unclear the situation is, Opec needs to ‘start preparing for more non-Opec competition.”

Iran oil exports not reduced, despite sanctions

Speaking to about possible emerging tensions between Iran and Saudi Arabia, Caroline Bain, The Economist’s Senior Commodities Editor shared her views on the state of each nation’s production and outlook:

“We are not currently factoring in a significant reduction in Iran’s exports. We expect Iran to produce 300,000 bpd less on average in 2011 than 2010, and a further 500,000 bpd less in 2012. However, prior to the EU embargo, we were already forecasting some slippage in Iran’s production owing to ageing fields and a lack of recent investment.”

According to Bain, Saudi Arabia’s higher production will help to stabilise the oil market and will not have a negative impact on other exporters – Iran being the possible exception. Saudi Aramco have inked various deals with Asian buyers looking to secure supply and reduce dependence on Iran.

“However, South Korea is a significant purchaser of Iranian crude,” highlights Bain. “Iran supplied 10% of the country’s domestic demand in the first nine months of 2011. In the last couple of months there have also been deals with Indonesia’s Pertamina and India’s Hindustan Corp.”

It is not clear that Saudi Arabia’s additional output will be sufficient to stabilise the oil market. There is also uncertainty about whether Asian buyers will absorb the Iranian oil that would have gone to Europe.

“The rhetoric suggests a reluctance to buy Iranian oil in Asia but the reality might be different, particularly if Iran offers discounted oil. Paying for Iranian oil will also be problematic and that may deter buyers. Total global supply is also difficult to estimate given that both Syrian and Yemeni oil output is currently disrupted and Sudan’s exports have come to a halt. Flows from the North Sea have also been disappointing so far this year. So the price is expected to continue to attract a risk premium.

“The biggest ‘geopolitical’ risk is probably if Iran fails to find buyers for its oil. Given how key oil revenue is to the functioning of the Iranian economy, it could be the catalyst for Iran to take more drastic, perhaps military, measures.”