Saudi Arabia: The world’s swing producer and most reliable oil supplier


Saudi Arabia: The world’s swing producer and most reliable oil supplier

Saudi Arabia is the only swing producer that has the spare capacity to stabilize oil markets. 

To meet the world’s growing demand for energy and to offset the global shortage of oil supplies, Saudi Arabian oil production rose from about 10.03 million barrels per day (bpd) in May 2018 to about 10.5 million bpd in June 2018. 

With the Kingdom raising production by nearly half a million barrels per day in just one month, this is proof that to meet market demands, Saudi Araba can reach a 12 million bpd target at a rapid pace. It is time for analysts to halt their tired tirades questioning Saudi Arabia’s output potential.

In the latest deranged reports, some analysts put forward the idea that Saudi Arabia increased its output by almost 500,000 bpd in June, mostly for local requirements. 

They say that the greatest part of the additional production went to increased domestic demand for direct burning in the local power sector to meet summer air-conditioning requirements, with a little additional production to offset declining output from other OPEC members.

If this were correct, then why in June 2017, did Saudi Arabia’s output stand at around 10 million barrels per day?

Perhaps it might be remembered that in November 2016, Saudi Arabia’s output was 10.72 million barrels a day. 

Then, for the first time since February 2015, Saudi oil output dropped below 10 million barrels per day in January 2017, after the Kingdom pared output by 560,000 barrels per day compared with its October 2016 baseline — deeper than its pledged cut of 490,000 barrels per day. 

Please remember how long it took Russia to drop its production by only 300,000 barrels per day amid the OPEC+ output cuts agreement in early 2017.

Saudi Arabia has continued building oil production capacity to meet demand and has never suspended upstream investments — even when oil prices tumbled below $30 early 2016

Faisal Mrza

This how the world’s one and the only swing producer acts primarily to balance the oil market and meet global oil demand. Saudi Arabia has unique oil infrastructure to adjust oil output swiftly to meet fluctuations in market demand.

As the world’s most reliable oil supplier, the Kingdom has invested in the oil infrastructure and logistics that the world needs. It has continued building oil production capacity to meet demand and has never suspended upstream investments — even when oil prices tumbled below $30 early 2016.

The global oil market will be facing a supply shortage and only Saudi Arabia can cover this supply deficit by boosting production. 

Saudi spare capacity is there even if some analysts claim that the most Saudi Arabia has ever pumped on an average monthly basis is 10.72 million barrels per day back in November 2016. 

Some commentator claim that this maximum spare capacity is in theory only and it takes time and money to bring these barrels online – up to one year. 

Others say the maximum production capacity of the Kingdom is 11 million barrels per day – running flat out at stress levels. 

And some say that a two million barrel per day Saudi production increase would move the Kingdom’s oil production into unchartered territory and would completely wipe out Saudi Arabia’s spare capacity.

With the start of the second half of 2018, it may be noticed that there is already an impact on global supplies. There are output declines from Norway, Mexico, Brazil, China, Venezuela, Colombia and other major oil producers. Additionally, the upcoming loss of Iranian barrels is not yet factored in.

The International Energy Agency said that last year, oil exploration and discovery were at the lowest levels since the 1940s. 

Thus, upstream CAPEX is insufficient at present and there will be an oil crisis in a few years if global demand keeps moving higher. This means that the world is trending toward a serious global oil supply shortage and Saudi Arabia is the only oil producer with an additional two million barrels per day in its production capacity.

Since the beginning of 2018, despite Brent trending above $70, upstream investment has been lacking – except in one place – Saudi Arabia. The Kingdom now towers above all others with its two million additional barrels of maximum sustainable capacity available to reach 12 million barrels per day.

  • Faisal Mrza is an energy and oil marketing adviser @faisalmrza
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