Saudis May Not Pump Intended 10 Million Barrels After IEA Move

Saudi Arabia may not increase crude oil output to 10 million barrels a day in July as it intended, as the International Energy Agency’s planned stockpile release of 60 million barrels will keep the market “well supplied” during the month, analysts say.

Analysts surveyed by Bloomberg now expect Saudi Arabia to increase output in July to 9.5 million barrels a day from around 9 million in June to meet its international commitments, while meeting local demand that is expected to rise this summer due to a surge in electricity use.

Saudi Arabia aims to fulfill Oil Minister Ali al-Naimi’s pledge to raise production to help calm oil markets, after members of the Organization of Petroleum Exporting Countries disagreed this month over his proposed 1.5 million barrels-a-day increase in the group’s output.

Al-Hayat newspaper, citing senior OPEC officials, reported after the meeting that the kingdom will boost output to 10 million barrels a day in July, the highest level in more than two decades. Now, analysts say this may not be the case after the IEA’s planned stockpile release of 60 million barrels over 30 days, or 2 million barrels a day.

Barclays Plc analysts led by Paul Horsnell said in an e-mailed note yesterday that the use of strategic petroleum reserves, particularly when Saudi Arabia has restated its commitment to supply customers with the crude they need, may result in fewer oil exports from Saudi Arabia in the coming months.

“If this release is not coordinated with Saudi Arabia, the Saudis will cut production to neutralize the effect of the release,” Anas Alhajji, chief economist at Irving, Texas-based NGP Energy Capital Management, said in an e-mail today.

Saudi Oil Production

“The IEA’s move will give the Saudis sometime before they need to increase output to that high level,” said Jarmo Kotilaine, chief economist at National Commercial Bank, Saudi Arabia’s largest lender in terms of assets.

Kotilaine said in a telephone interview that Saudi Arabia intended to boost oil production to more than 10 million barrels a day by July, which would be the highest level in more than 25 years. Ongoing efforts by Saudi Arabia to dramatically boost output might prove counterproductive, he added.

Saudi extraction has come to rely heavily on water injection, which will ultimately curb potential production, he said. Moreover, the high sulfur content in Saudi oil means that the costs of refining it are higher than elsewhere, so the market may not take most of the additional output the kingdom is planning to pump, Kotilaine said.

While Saudi oil output will increase, one has to distinguish between the local and international drivers, said John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi.

“Output will increase due to local demand but Saudi Arabia would find it hard to supply more oil for the global market, given current supply fundamentals and global demand,” he said.

IEA, Saudi Arabia Coordination

Market supplies will become tighter if OPEC doesn’t increase production, and while Saudi Arabia will “definitely” raise its output, that will take time, IEA Executive Director Nobuo Tanaka said in Beijing on June 25.

IEA’s planned stockpile release of 60 million barrels over 30 days, or 2 million barrels a day, is less than a quarter of Saudi Arabia’s output, and below the Middle Eastern nation’s spare production capacity, based on data compiled by Bloomberg.

Noe van Hulst, secretary general of the International Energy Forum said that the IEA’s stockpile release must have been made in coordination with large producers such Saudi Arabia.

“I’m not surprised to see such a move from the IEA, as discussions on replacing supplies from Libya were eminent in recent months,” he said in a telephone interview yesterday. “Coordination between producers and consumers was also intense and everyone is working closely.”

Analysts such as Alhajji say Saudi Arabia must have known of the IEA move in advance. “There are indications that the release might have been coordinated with the Saudis,” Alhajji said.

The main issue after the IEA release of 60 million barrels is “to see whether companies will use all of it, as historical records show that only a portion of the release is sold or swapped,” Alhajji said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE