Saudis keep pumps primed
The kingdom is talking to other producers about curbing output, while doing its utmost to maximise its own
Saudi Arabia's record-busting oil production run won't have boosted its popularity ratings among Opec producers. But Aramco's strategists, believing global demand to be strong and still fretting about competition from Iran, Iraq and Russia, won't bother too much about that.
It sets the ground for another tricky meeting of producers in Algiers on 27 September, when Opec and Russia might revive the freeze plan that collapsed in Doha in April. (You'll have read about the meeting on PE's website before receiving October's print magazine, which went to press before the powwow.)
But Saudi Arabia's recent output surge might be as seasonal as it is strategic. Temperatures in the Arabian Peninsula went well beyond the usual sweltering notch this summer, and Aramco's oil still fires many of the kingdom's power stations, which keep the air conditioners running. Saudi oil production over the past decade has averaged around 400,000 barrels a day more in July than January.
At first glance, the figures contained in Opec's latest monthly bulletin, released on 12 September, suggest this explains things too-a bit. Saudi oil production rose in August by 28,000 b/d over the previous month, to 10.6m b/d. That top number is still more than the 10.5m b/d the market-given nudges by Saudi officials earlier in the summer-had expected.
In fact, Saudi domestic crude demand has been lower than expected. Thanks to the start-up of the Wasit gas plant, direct burn in July was 150,000 b/d lower than a year earlier, at 0.75m b/d.
The signs were there earlier in the year. Domestic demand for oil increased by an average of 24,000 b/d in the first five months of 2016, according to the Joint Oil Data Initiative (Jodi). This represented the slowest growth rate for that period since at least 2010.
The lower consumption reflects weaker economic growth in Saudi Arabia too. The slump has deepened, says Capital Economics, a consultancy. GDP output in the second quarter alone was 2% less than in the same period a year earlier-the first contraction in the Saudi economy since 2009.
So the increase is for overseas customers. Senior Saudi officials point to robust demand in Asia and the US as justifying the full-tilt pumping. In early September, Aramco raised its prices for October sales to these markets, a reflection of strengthening demand. The official selling price for Arab Light crude to Asia, for example, was raised by $0.90 a barrel.
Saudi Arabia has certainly not been worried, as others have, by global demand prospects. The most recent International Energy Agency market report suggested a softening of consumption is stalking the world's market again. But Saudi oil minister Khalid al-Falih, visiting Asian countries in early September, voiced no such concerns.
Jodi data show that Aramco's crude exports averaged 7.52m b/d in the first half of 2016, a record. Combined crude and refined-product exports rose to 8.83m b/d in June, the highest ever for that month. Customers received 7.46m b/d of crude that month, 450,000 b/d higher than in June 2015.
Big Asian consumers topped the destination list for this crude. In August, Opec figures show Saudi Arabia shipped 0.95m b/d to China alone. Saudi Arabia accounted for 34% of Japan's crude imports.
While Saudi Arabia and Russia seemed to agree about some sort of joint supply strategy during a meeting between Vladimir Putin and Mohammed bin Salman at the G20 in early September, the kingdom's drilling was carrying on apace. The Saudi rig count in August stood at 156, well up on 2014's 134.
The fruits of the upstream work are in plain sight. The Shaybah field in the Empty Quarter has seen 250,000 b/d of extra light grade crude added since June (bringing field output to 1m b/d), and another 300,000 b/d should come on stream by end-2017 or early 2018 at the Khurais field, boosting production there to 1.5m b/d.
Easier oil could back on stream if the shared Neutral Zone with Kuwait is ever reopened. The onshore component ceased output of 200,000 b/d in May 2015, while the 300,000 b/d offshore section has been shut since October 2014. The two countries have been vague about when their dispute over the fields might end, and production resume.
Traders may grumble about Falih's mixed signals, but indeed at least, the Saudis are showing they will keep the taps open.