Too early to write off the Gulf oil

Too early to write off the Gulf oil
Updated 03 November 2013

Too early to write off the Gulf oil

Too early to write off the Gulf oil

Market trends indicate clearly that the Gulf will continue to be in the heart of the energy industry for years to come.
This is the reality despite the flow of reports on the potential impact of the US shale oil on the energy market and expected undermining of Gulf oil producers.
Despite signs of shift of gravity westwards, so far there are no strong reasons to write off the dominance of Gulf exporters.
The latest report by the US Energy Information Administration (EIA) shows that OPEC production last month has dropped to its lowest level in two years to the extent that it is currently pumping some 2.3 million barrels per day (bpd) below its capacity.
The report pointed out that OPEC output amounted to 29.7 million bpd against an adopted target of 30 million bpd since early last year.
Industry reports, however, said before that September output figures amounted to 29.9 million bpd, which puts the organization’s production then at its lowest level in two years.
However, revising figures later in the month showed that September output in fact averaged 30.1 million bpd.
Since other industry reports suggested that October figure amounted to 29.9 million, still below 30 million and lowest in two years, but leaves a room for future revision as happened before.
However, regardless of the final outcome, the downward trend may be there as more shale oil is coming on-stream in the US boosting its domestic production by 50 percent during the past five years and expected to continue that trend in the near future.
But as the US is cutting on its oil imports and reducing its dependence on foreign supplies, others led by China and India are coming along to fill the gap.
According to the Paris-based International Energy Agency (IEA) the past third quarter performance showed that the four Gulf states of Saudi Arabia, the UAE, Kuwait and Qatar with their combined output of 16.4 million bpd have managed to meet 18 percent of world oil demand during the third quarter, a level achieved only twice in the past three decades period.
That production figure could be translated into estimated $150 billion revenue.
And that is because, China which was or about to take over as the top world oil importer, is getting currently 25 percent of its oil needs from the Gulf states, compared to 21 percent six years ago, while India is getting up to 44 percent of its oil needs from the Gulf, up from 36 percent two years ago.
One major factor that characterizes the Gulf producers, especially Saudi Arabia, is that they adopt the strategy of maintaining a spare production capacity so as to compensate for any shortage in any producing country for whatever reason.
And that is exactly the case with reduction in output in Iran because of US sanctions, in Libya because of the deteriorating security situation that has affected oil production and because of theft and related security problems in Nigeria.
With continued turmoil in a number of producing countries namely the three mentioned above, it seems that there will always be a room to call on the Gulf producers to step in and appropriate the difference.
The issue of the spare capacity, which involves huge investment, becomes clearer when compared with the performance of world oil major companies, who are usually driven to maximize their profit and are governed by their shareholders desire to see improvement into their share value every quarter.
If recent available figure are any guide, they show a declining profit because of weak profitability margin in the refining sector.
For instance Royal Dutch Shell showed a 31 percent drop in its third quarter profit to $4.2 billion and it attributed that mainly to the weak performance of the refining sector.
Its US counterpart Exxon Mobil, though did better, but still has registered an 18 percent profit drop to $7.9 billion.
It also blamed refining weak profit margin that has netted only $592 million against $3.2 billion profit a year earlier.
IEA’s chief economist Fatih Birol summed up all by saying that, “despite shale revolution, the Middle East is and will remain the heart of global oil industry for some time to come.”

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