Posted on 06/06/2006 1:06:58 PM PDT by thackney
With Saudi Arabia's latest revelation, there's one less mystery to what's been behind oil price strength over the past few months.
While Saudi Arabia has said it's investing heavily to raise its oil output capacity to 12.5 million barrels a day in 2009 from 11.3 million b/d, the world's No. 1 crude producer has been quietly cutting back current volumes.
Saudi Oil Minister Ali Naimi, in an interview with The Wall Street Journal published Monday, said the country's output in April averaged 9.1 million b/d, its lowest level since January 2005.
Global oil prices have risen 10% from a first-quarter average of $65 a barrel to hold above $70 since the cut was implemented.
Naimi, speaking after the Caracas meeting of the Organization of Petroleum Exporting Countries, said the reduction was in response to a drop in demand, not an attempt to limit supply and prop up prices.
The oil minister suggested that the Saudis and others in OPEC would be happy to sell all the oil they could at current prices, implying that the Kingdom will lift supplies when demand from refiners increases.
The policy solidifies the Saudis' preference to act as a price-taker rather a price-maker in the current market, as Naimi ruled out discounting oil to sell it or offering cargoes on the spot market.
"We will not leave money on the table," Naimi said.
The Saudi attitude seems to suggest that, while the Kingdom might not directly endorse the current level of global prices, there is an attitude of acceptance and the Saudis clearly aren't going to act aggressively to bring it down.
Analysts said that while they couldn't quantify where prices would be if the Saudis hadn't taken a deliberate decision to reduce their output, oil prices most certainly would be weaker.
Don't Count On Saudis To Lower Price
The oil market, more than ever, has come to resemble an intricate Persian carpet, with many factors tightly woven together. Unraveling it can't be done by pulling on a single thread. Still, given Saudi clout in the market - the country holds most of the world's spare capacity - the Kingdom's output policy is central to the course of prices.
"If you're an American and counting on the Saudis to bring the price down, you're counting on the wrong horse," said an oil analyst who spoke on the condition of anonymity, citing his company's sensitivity in dealing with the Saudis.
The Saudis and OPEC have come under steady criticism from many in Congress for production restraint policies that are seen as fueling the continuing price rise. After campaigning in 2000 to "jawbone" OPEC into lowering oil prices, the Bush administration has shifted to seeing the Saudis as a reliable supplier of oil, while de-emphasizing prices and talking of using alternative fuels to limit oil imports down the road.
Crude oil prices have been pushed to nominal record highs by a host of factors on the supply and demand side. Soaring oil use in China and other developing countries came as geopolitical factors have disrupted output across the globe from Iraq to Nigeria to Venezuela at a time when there's little spare production capacity. An attempted terrorist attack on the world's largest oil processing facility in Saudi Arabia, and tensions over Iran's nuclear ambitions are keeping prices near $70 a barrel.
On the New York Mercantile Exchange, crude futures approached $74 Monday after Iran's supreme leader, Ayatollah Ali Khamenei warned that Iran would disrupt energy shipments from the Gulf should the country come under attack from the U.S. The U.S. and its allies are attempting to negotiate an arrangement with Iran which will prevent it from gaining the ability to produce nuclear weapons, while Tehran insists it only wants to develop nuclear power.
Ahead of the OPEC meeting, host Venezuela made hawkish comments that it wanted the group to cut output, even in the face of current high prices. While OPEC officially kept its output ceiling unchanged at 28 million b/d, the Saudis in cutting back have moved back to their assigned quota level.
Some analysts don't see Saudi Arabia revealing itself as a true price hawk with the singular move.
"The Saudis are not trying to cut (output) to bid up prices," said Yasser Elguindi, senior analyst at Medley Global Advisers in Philadelphia. "That's wholly absent from Saudi production policy now. There's no linkage whatsoever."
Supply To Rise With Refiner Demand
The Saudis "are having trouble moving product and are just not going to keep it out there on the market. They are reacting to things going on around them," Elguindi said, such as steep cutbacks in refinery operations in recent weeks. In early April, U.S. refiners processed their lowest volume of crude oil for that time of year since 1997.
Elguindi said it's "much more difficult today to get a handle" on the global oil market than ever before. That's because much of the growth in demand apparently is coming from countries such as China where data is often unreliable. And refiners want to hold more crude than ever before in a market with fairly tight spare production capacity.
Naimi told the Journal that the Saudis were having difficulty finding buyers for all of its grades of crude, not just harder-to-refine heavy crudes.
The newspaper quoted a senior Iranian oil official at the OPEC talks confirming that his country, the second-biggest producer in OPEC, was having trouble selling oil and was storing it, rather than selling it.
In the U.S., refiners are expected to sharply boost operations in coming weeks as the peak summer demand season for gasoline approaches. Medley's Elguindi believes that as U.S. refiners increase their appetite for crude, Saudi output will also rise.
"They'll be back at 9.4 to 9.5 (million b/d) in the not-too-distant future," he said.
Let them. Do you think we would be worse off with billions of dollars remaining in this country and not going to them?
Is it time yet to invade the middle east and take all the oil?
Right - with friends like the Saudis.....
They may be reducing output because they want to give their fields a rest. Many knowledgeable folks think they are much farther along their production peak than is commonly thought.
You can't reach too many conclusions based on one month of refining data. Demand for oil products is lowest in the Spring and early Fall, so that's when refiners do some shut-downs for maintenance and repairs. As far as I know, the refining industry has been running very hard at 85-95% of full capacity for a couple of years now. Refiners are working on some refinery expansions now, but they still remember the 1980s when growth of gasoline demand was flattened by improving vehicle fuel economy and the refining industry had major excess capacity. I would think that refiners are studying the auto industry carefully and trying to predict how much fuel economy will improve in the next ten years. That's a tough forecast to make, but I don't see any major breakthrough that will improve fuel economy substantially (other than people just buying smaller vehicles with smaller engines.) Hybrids are still too costly to produce in large numbers and clean diesel is still at least several years away.
The other problem is that by the time oil reaches the surface in ANWR (seven or eight years), a million barrels a day will be an even smaller percentage of total consumption in America and worldwide. If the price of oil continues to rise, a million barrels will be relatively inconsequential to the overall pain. At that point, China and India will gladly soak up whatever demand we remove from Saudi Arabia, and we'll still be dependent on them to meet our needs.
The point is, any way you cut it, Saudi Arabia will still have us over a barrel (no pun intended). Pissing them off by undercutting them can only lead to more pain.
Most of the world's refining capacity lies outside the US. There is not a world wide shortage of refining capacity.
If it leads to billion dollar loaves of bread, yeah. (I'm exaggerating, of course, but you get my point. We can't hurt Saudi Arabia without hurting ourselves).
That sounds like more reason to produce our oil, increased need. ANWR is not the total solution, but it is part of the solution.
No I don't get your point. Saudi Arabia is not dependent on the US, their oil and the majority of OPEC's oil goes to other customers.
I've heard there is more refining capacity outside the US. It may be that when oil companies add in the extra shipping cost, the imported gasoline costs enough to suppress demand in consuming nations like the US and then the extra Saudi output isn't needed.
I don't follow you. Shipping costs of gasoline into the US would not be greatly different that shipping cost of crude oil to the US that we then refine.
Well it depends where the imported gas is refined. We're importing gasoline from South Korean refineries into the US west coast. If the oil originates in the Middle East, then some extra shipping distance is added to go north up to Korea and then on the US west coast (mainly to California). I think gasoline is a little more explosive than crude oil and is more hazardous to ship, which may add to insurance costs for shipping. It's also possible that refineries overseas are not quite as large and cost-efficient as US refineries.
Saudi Arabia: "We put the 'Lies' in 'Allies.'"
You think the Saudi's ship us refined crude (gasoline)? No they don't.
I do not believe you will find this true. Refineries exist in all the parts of the world that produce oil.
I think gasoline is a little more explosive than crude oil and is more hazardous to ship, which may add to insurance costs for shipping.
Explosive atmosphere in the confined space requires the same type of equipment for either. Hazardous area classification for electrical equipment in the petroleum industry is one of the jobs I do. Since explosions or fire of gasoline shipments is almost never happens, I doubt this is a significant cost difference.
It's also possible that refineries overseas are not quite as large and cost-efficient as US refineries.
Possibly, but certainly they are less expensive in terms of labor, energy and regulations.
Well I know for a fact that the US imports gasoline from South Korea into the US west coast. So there is some extra shipping distance required to go from any major oil producer to South Korea and then on to the US.
The other cost factor that is holding down US gasoline consumption is the new ethanol requirement, which has added about 20 cents to the price of gasoline in the affected regions of the US. That price increase is holding down demand to some extent and reducing the need for Saudi crude.
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