Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
The Death of the US Real Estate Dream - 22nd Jul 18
China is Now Officially at War With the US and Japan - 22nd Jul 18
You Buy the Fear in Gold - 22nd Jul 18
Trumponomics Stock Market 2018 - The Manchurian President (1/2) - 21st Jul 18
The Death of Japan's Real Estate Dream - 21st Jul 18
SMIGGLE Amazing Mega Shopping Haul, Pencil Cases, Smigglets and Giant Back Packs! - 21st Jul 18
Cayton Bay Beach Caravan Park Holiday - What's it Like? - 21st Jul 18
Gold Stocks Investment Wanes - 20th Jul 18
Diversifying Your Stock Investing Strategies is Smart Investing - 20th Jul 18
Custom Global Stock Market Indexes May Be Sounding Alarms - 20th Jul 18
S&P 500 Just 2% Below Record High, But There's More Stock Market Uncertainty - 19th Jul 18
Stock Market Technical Picture - 19th Jul 18
Gold Market Signal vs. Noise - 19th Jul 18
Don’t Get Too Bullish on Gold - 19th Jul 18
Bitcoin Price Rallies to Upper Channel – What Next? - 19th Jul 18
Trump Manchurian President Embarrasses Putin By Farcically Blowing his Russian Agent Cover - 19th Jul 18
The Fonzie–Ponzi Theory of Government Debt: An Update - 19th Jul 18
Will the Fed’s Interest Rate Tightening Trigger Another Financial Crisis? - 18th Jul 18
Stock Market Investor “Buy the Dip” Mentality is Still Strong, Which is Bullish for Stocks - 18th Jul 18
Stock Market Longer-Term Charts Show Incredible Potential - 18th Jul 18
A Better Yield Curve for Predicting the Stock Market is Bullish - 18th Jul 18
U.S. Stock Market Cycles Update - 18th Jul 18
Cayton Bay Hoseasons Caravan Park Holiday Summer 2018 Review - 18th Jul 18
What Did Crude Oil - Platinum Link Tell Us Last Week? - 17th Jul 18
Gold And The Elusive Chase For Profits - 17th Jul 18
Crude Oil May Not Find Support Above $60 This Time - 17th Jul 18
How Crazy It Is to Short Gold with RSI Close to 30 - 16th Jul 18
Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18
Stock Market Uptrend Continues, But... - 16th Jul 18
Emerging Markets Could Be Starting A Relief Rally - 16th Jul 18
(Only) a Near-term Stock Market Top? - 16th Jul 18
Trump Fee-Fi-Foe-Fum Declares European Union America's Enemy! - 16th Jul 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Can Saudi Arabia Prevent The Next Oil Shock?

Commodities / Crude Oil Jun 15, 2018 - 03:34 AM GMT

By: OilPrice_Com

Commodities

The ongoing speculation online about the future of cooperation between Russia and OPEC seems to be a little one-sided. The main point of discussion up until now has been the fact that, due to international pressure (such as Trump’s Twitter diplomacy, perceived Russian willingness to open up the taps and pressure from Asian consumers) Saudi Arabia will be willing to revoke its current production cut stance.

Current volatility in the global oil market is, according to most analysts, due to fears that markets are facing a severe threat. A doomsday scenario is being painted in the media which suggests that oil prices will collapse as Moscow and Riyadh allow for OPEC compliance to slip, and that a glut of Saudi crude will be hitting the market. This has been the leading theme in the last couple of days, after reporters stated that Moscow and Riyadh are ready to assist the market.


At the same time, analysts and pundits support the thesis that Saudi Arabia is able to produce at least 12.5 million bpd, which will be hitting the market on short notice. No one has really assessed the Saudi spare capacity capabilities though, with a majority of analysts taking the aggressive rhetoric for granted.

Saudi Arabia, the Kingdom of Oil, will be the savior of the oil universe as it holds not only 276 billion barrels of reserves, but also can hit the market with millions of barrels of Saudi sweet to confront or mitigate possible shortages caused by Venezuela’s collapse, the lack of U.S. oil infrastructure, and the impact of Iran sanctions. The main question to be answered, hopefully before reality hits us, is if the Kingdom of Oil really is capable of opening the taps and keep them open in the long term.

Several analysts have been warning about the possible technical issues Saudi Aramco is facing for years. The lack of inside information into the world’s largest NOC is one of the main reasons behind this.

Some insiders have, however, been opening up some doors, indicating that Aramco could have hit a possible production ceiling, as production on several large fields, including Ghawar, has been hit by a long list of issues.

In addition to the normal upstream problems, such as black powder, corrosion, biological fowling and misuse of seawater injection for decades, other issues could also affect overall capacity. Sources have seen major pipelines being blocked by corrosion and scaling, while other production has been hit by major sludging threats. These production issues are known, but the impact has never been able to be assessed fully. Financial analysts have always based their forecasts on open sources, such as reports from the IEA, EIA and OPEC, in which the statement is being repeated that Saudi Arabia has spare production capacity.

In recent years, especially since the Russia+OPEC production cut agreement, it became a fact of life. Existing production capacity of Aramco was seen as a law, and analysts even concluded that production cuts increased overall spare capacity by the same number. Few analysts dared to ask the main question: “If there is spare capacity available, can you prove the figures? At the same time, market watchers should have asked themselves the question: “When did Aramco ever produce even 11 million bpd in the last few years.

Additionally, there are other indicators that Saudi Aramco could be fighting an increasingly difficult battle to keep overall production up in its existing fields. While analysts differ about the exact rates, production declines can be expected to be above 6 percent per year on average. If this is taken as a fact for all production in the Kingdom, additional new production needed to come onstream is around 600,000-750,000 bpd per year.

Hence the ongoing impressive investment schemes, which were even in place during the last oil crisis, as continuous innovation is needed to keep existing production at the same level. This fact is also a major driver for the ongoing discussion within Aramco to speed up conventional field developments on- and offshore, such as in the Arab Gulf (shallow water) and the current focus on shallow-deep-water Red Sea area. The costs of drilling and developing these projects are much higher, than the very easy onshore oil that Saudi Arabia traditionally drilled. Still, the need is there to keep overall production figures at the same level, while even trying to get additional spare capacity. With the widely published spare capacity of 2-2.1 million bpd, the need for these projects would be much less than current investments show.

When these questions are not being addressed, but become reality, OPEC’s upcoming meeting will be put in another light. Without a real spare production capacity, or with a much lower capacity, the current discussion is null and void. Additional oil on the market will be constrained, leaving a ceterus paribus situation, with increased threats from Venezuela and Iran.

As U.S. bank Goldman Sachs already indicated, demand for crude oil and products is not showing any real slowdown. If production cuts stay in place, markets will tighten at an even faster pace. 

Despite the still elevated inventories and a small supply overhang, the Russia/OPEC mission has been mostly accomplished. A healthy appetite for crude, combined with an unexpected high level of compliance (or forced compliance in Venezuela’s or Libya’s case), has stabilized markets. Demand, as reported by all institutions and market watchers, is expected to be robust. The threat of higher oil prices culling demand is still very low, but will be looming on the horizon. For 2018-2019, no real risks exist for an oil price showdown. Without a real global financial crisis, lights are on green for a tight crude oil market for an extended period of time. OPEC’s Vienna meeting will not trigger a new oil glut. Some goodwill gestures might be expected, such as the use of Saudi’s floating storage, but in reality no options exist to move anything. Without major new investments outside of Saudi Arabia or the GCC region, the world is heading for higher prices long-term. Counting on Saudi Arabia’s spare capacity could be foolish.

Link to original article: https://oilprice.com/Geopolitics/International/Can-Saudi-Arabia-Prevent-The-Next-Oil-Shock.html

By Cyril Widdershoven of Oilprice.com

© 2018 Copyright OilPrice.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

OilPrice.com Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules