Wednesday, February 13, 2013

Can Saudi Arabia Continue to Single-handedly Support the Market Price for Oil?

I'm guessing not for much longer but they may not have to, they may be getting some help on the demand side.
This meander was sparked by a comment on Izabella Kaminska's  FT Alphaville post, "A physical vs forward commodity market disconnect":
or perhaps not | February 13 6:20am | Permalink
There is no need for the Westen oil majors to engage in cartel behaviour since they have OPEC to do it for them. Its the state-owned companies (e.g. Aramco) that dominate oil markets, particularly those outside the US. For Saudi and the gulf states the difference between above ground and in-ground inventory is very little. Costs are low and extraction is easy. Not so for North American producers which are increasingly offshore, shale, tar sands or other unconventional sources. Is the expanding Brent/WTI spread evidence that it is the market dominance of the cartel that is responsible for high prices, rather than rising production costs, as is often claimed by the industry? 
This was in response to an earlier comment by 2SP:
2sp | February 12 4:00pm | Permalink 
Izzy, do wonder though where all the excess physical oil inventories are stored? Agree that there is quite a glut in cushing & by extension the wider US market, but inventories in the rest of the OECD do not appear excessive according to the latest IEA Oil market Report. No saying that your assumption of oil majors holding back production is wrong, though can't substantiate it neither. It would be quite a journalistic coup if one could produce evidence of such voluntary scaling back oil production at one of the majors....
Ms. Iz also responded in a diplomatic manner whereas I would have referred the commenter to our Feb. 4 post:
...They thought they were being profound when they asked "Where's the inventory" when really all they were doing was exposing their ignorance of the concept of in situ hoarding....  
Now I shall be able to send them to the much less snarky response of 'or perhaps not'.
First up, Platts:
OPEC pumps 30.45 million barrels of crude oil per day in January
Saudi Arabia continues production dip, weighing on producer group’s output 
London - February 7, 2013

Crude oil production from the Organization of the Petroleum Exporting Countries (OPEC) fell to 30.45 million barrels per day (b/d) in January from 30.65 million b/d in December, led by a further drop in volumes from Saudi Arabia, a just-released Platts survey of OPEC and oil industry officials and analysts showed.

Saudi Arabia reduced output to 9.25 million b/d in January from 9.45 million b/d in December. The January level was the lowest since an estimated 9.05 million b/d in May 2011.

Lower Saudi output in recent months largely reflected the seasonal reduction in direct burning of crude oil for electricity. The January estimate is down some 750,000 b/d from the recent production peak last August.

“This report is yet another affirmation that Saudi Arabia is willing to narrow what had looked like a big gap between supply and demand almost completely from its own production,” said John Kingston, Platts global director of news. “All data a few months ago was pointing to a gap that looked large; now, it’s a lot smaller. And the biggest factor in closing that gap has been a reduction from Saudi Arabia.”

In mid-January, Ibrahim al-Muhanna, an adviser to Saudi oil minister Ali Naimi, rebutted any suggestion that the kingdom had cut output in order to boost oil prices. Muhanna said Saudi production was being driven primarily by customer needs, including seasonally variable domestic demand which had weakened over the previous quarter from the summer peak....MORE
I have seen lower guesses for Saudi January production, as low as 8.8 mm b/d while Dow Jones had it at 9.1 mm b/d.
From Reuters via Business Day Live:

Oil price rises as Opec, EIA increase demand forecasts
Brent crude steadied on Wednesday, holding just below a nine-month high near $119 a barrel on forecasts for a faster than expected growth in global oil demand this year, but easing tension in Iran subdued prices.

The US Energy Information Administration (EIA) and the 12-member Organisation of the Petroleum Exporting Countries (Opec) increased their outlooks for world oil consumption growth, citing increasing signs of a recovery in the global economy....MORE
Here's Opec's Monthly Oil Market Report, released yesterday.

See also Reuters' John Kemp's Feb. 1 column "Saudi Arabia must shoulder blame for high oil prices".