Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Massive Stock Market Price Reversion May Be Days or Weeks Away - 22nd Sep 19
How Russia Seized Control of the Uranium Market - 22nd Sep 19
Dow Stock Market Trend Forecast Update - 21st Sep 19
Is Stock Market Price Revaluation Event About To Happen? - 21st Sep 19
Gold Leads, Will the Rest Follow? - 21st Sep 19
Are Cowboys Really Dreaming of... Electric Trucks? - 21st Sep 19
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

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

© 2005-2019 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