Saudi Oil-Rig Use Soars as Obama Pressed on SPR: Energy Markets

Saudi Arabia is deploying the most oil rigs in four years as it prepares for possible shortages caused by tension with Iran, giving President Barack Obama one less reason to answer calls to curb prices by releasing supplies from America’s emergency reserves.

The number of rigs used in the desert kingdom more than doubled in January from a year earlier, the biggest annual increase on record, data from Houston-based Baker Hughes Inc. (BHI) showed. As much as 1 million barrels a day of Iranian crude exports may be lost as the U.S. and Europe tighten sanctions against President Mahmoud Ahmadinejad’s government over its nuclear program, the International Energy Agency said Feb. 10.

Brent, the benchmark for more than half the world’s oil, rose to a 10-month high Feb. 24, propelling U.S. retail gasoline to the highest ever for this time of year. Democrats urged Obama last week to tap the nation’s Strategic Petroleum Reserve for the 18th time since 1985. Iran’s buyers in Asia and the European Union are cutting purchases to comply with sanctions, raising demand for alternatives at a time when supplies are disrupted in Yemen, Libya, Syria and South Sudan.

“There’s a desire in Saudi Arabia and the U.S. to control price volatility and reassure the market,” Sadad al-Husseini, founder of Husseini Energy consultancy in Dhahran, said in a phone interview on Feb. 29. That “is why Saudi is pumping near record levels. Releasing oil from the SPR would be one of the dumbest things to do. They are just saying that to try and bring prices down.” He is a former executive vice president for exploration and development at state-run Saudi Arabian Oil Co.

Shuttered Production

Oil surpassed $120 a barrel on Feb. 20 for the first time since May, when conflict in Libya had all but shut off exports from the north African country, as the sanctions against Iran, OPEC’s second-largest producer, renewed concern supplies will be disrupted. Brent crude for April delivery was at $125 a barrel on the London-based ICE Futures Europe exchange at 5:37 p.m. local time. It traded at $125.55 on Feb. 24.

OPEC’s basket of crude oil has stayed above $120 a barrel for five days, the longest stretch since July 2008. The basket, a weighted average price of the main crude grades produced by Organization of Petroleum Exporting Countries, was at $120.79 yesterday after reaching $123.25 on Feb. 27, the highest since July 23, 2008, data on the producer group’s website showed today. Oil from OPEC rose to more than $120 for two days last year on April 28 and April 29, after production in Libya was disrupted amid the rebellion to oust Muammar Qaddafi.

South Sudan, Yemen

Libyan supplies are about 460,000 barrels a day lower than the 1.6 million barrel daily rate in January 2011, before the uprising began, according to a Bloomberg survey of oil companies, producers and analysts. About 600,000 barrels have been lost because of fighting in Yemen and Syria and a halt to supplies in South Sudan because of a dispute with its northern neighbor, according to the Paris-based IEA.

Saudi Arabia (OPCRSAUD) used 49 rigs in January, compared with 48 in December and 23 a year earlier, Baker Hughes, the world’s third- largest oilfield-services provider, said Feb. 7. The nation employed an average of 47 rigs in the fourth quarter, up from 39 in the previous three months. Rig use peaked at 57 in August 2007, as the country implemented a program to boost capacity to 12.5 million barrels a day.

The kingdom is producing 9.8 million barrels a day and has about 2.5 million barrels of spare capacity, Saudi Deputy Oil Minister Prince Abdulaziz bin Salman said during a visit to India last week, the same amount as Iran’s exports. The country boosted output to 10.047 million in November, the highest level since at least 1980.

‘Responding to Demand’

“The kingdom is responding to demand for more crude, and part of this demand is related to upcoming sanctions on Iranian oil,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London, said by e-mail on Feb. 27. “What could motivate a use of strategic stocks is the lost volumes of Syria, Yemen and South Sudan combined. Here you face actual supply disruptions, so the U.S. and the IEA may decide to release oil to bridge the gap as Saudi continues to pump more.”

China, Japan, India and South Korea, which together bought 59 percent of Iran’s oil in the first half of last year, are deepening ties with Saudi Arabia before U.S. sanctions against financial institutions against the Islamic republic take effect at the end of June. Chinese Premier Wen Jiabao, South Korean President Lee Myung Bak and Japanese Foreign Minister Koichi Gemba visited Riyadh this year to strengthen relations, while India asked for more oil on Feb. 23. tons more oil from Saudi Arabia next year.

‘No Need for Concern’

“The market is very much well supplied and there’s no need for concern,” Saudi Arabia’s Prince Abdulaziz said on Feb. 23 in New Delhi. “We have demonstrated to our friends here how much excess capacity there is today and how much capacity will be there in the future.”

Saudi Aramco is bringing the Dammam field, its oldest, back on stream this year, according to the Economist Intelligence Unit. The heavy crude is a “good” replacement for Iranian oil, said Caroline Bain, a senior economist at the London-based EIU.

“One explanation for reviving fields like Dammam is that the Saudis are currently overestimating their spare capacity, so they are drilling more as it looks like they may actually need to use it,” Bain said. “We estimate them to have about 3 million barrels a day spare currently, but perhaps the amount that’s readily available would be quite a lot less than that.”

The Obama administration is considering tapping the strategic reserve, Energy Secretary Steven Chu said Feb. 28 amid rising fuel prices. Gasoline this week averaged $3.721 a gallon, 10 percent above the levels of a year ago and the highest for this time of year in Energy Department records starting in 1973.

‘Purely Political Move’

Representatives Ed Markey of Massachusetts, Peter Welch of Vermont and Rosa DeLauro of Connecticut, asked Obama Feb. 22 to release oil from the strategic stockpile. Republicans opposed the request.

“Releasing oil from the Strategic Petroleum Reserve would be, at best, a short-term benefit,” Senator John Barrasso, a Wyoming Republican, said in a statement Feb. 28. “This purely political move would cause more harm than good.”

The Republicans, the energy industry and some Democrats oppose a release now, saying supplies must be available, for example, in the event Iran blocks the Strait of Hormuz, the transit point for 20 percent of the world’s oil.

European gasoline prices at the pump reached a record 1.6 euros a liter on Feb. 24, or $8.15 a gallon, weekly EU data compiled by Bloomberg showed.

“Saudi drilling is mostly independent of the use of the SPR because they act on different time horizons,” Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc. in London, said Feb. 27. “New rigs are going to have an effect in the medium-to-longer term, while the SPR is a short-term tool. The Obama administration has used the SPR before, so, if the circumstances were right, I wouldn’t rule its use out.”

To contact the reporter on this story: Ayesha Daya in Dubai at adaya1@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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