OPEC members, industry analysts differ over oil supplies

Sam Fletcher
OGJ Senior Writer

Eric Watkins
OGJ Oil Diplomacy Editor

HOUSTON, Apr. 25 -- Ministers of the Organization of Petroleum Exporting Countries expressed concern over high oil prices in world oil markets, but reiterated their claim there is no shortage of crude supplies.

“The market is overbalanced,” said Ali I. Al-Naimi, Saudi Arabia’s petroleum minister. “Our production in February was 9.125 million b/d, in March it was 8.292 million b/d. [Third-party estimates put Saudi production at 9 million b/d in January and February.]

“In April we don’t know yet, probably a little higher than March. The reason I gave you these numbers is to show you that the market is oversupplied,” Al-Naimi told reporters on the sideline of the recent 4th Asian Ministerial Energy Roundtable Meeting.

“The market is adequately supplied and our (OPEC’s) production in March was almost the same as in December even though a member country is out of production,” said Abdullah Al-Badri, OPEC’s secretary general, referring to Libya.

Yet the US Energy Information Administration earlier reported OPEC output had fallen to the lowest level since May 2004 (OGJ Online, Apr. 15, 2011).

In London, analysts at the Centre for Global Energy Studies (CGES) said, “Oil prices are rising to levels that are beginning to affect demand, yet the world is being told once again that markets remain ‘well-supplied’ with crude and that the upward march of prices does ‘not reflect the realities of supply and demand.’” They said OPEC members have not replaced oil production lost to the conflict in Libya, leaving a shortage of 1 million b/d in March (OGJ Online, Apr. 18, 2011).
Even when producing 9 million b/d, Saudi Arabia still left "a significant deficit at the margin of the market with inventories falling faster than normal, even before Libyan exports came off the market," said Paul Horsnell, Barclays Capital’s managing director and head of commodities research.
“Allowing for a normal second quarter global inventory build and replacing lost volumes from elsewhere seems likely to require Saudi Arabia to move up to 10 million b/d [production], in conjunction with higher volumes from the other holders of spare capacity (Kuwait, UAE, and Qatar),” he said (OGJ Online, Apr. 4, 2011).
Saudi Arabia’s production cut in a period of near-record-high prices is “a game changer” for world oil markets, said Olivier Jakob at Petromatrix in Zug, Switzerland.

For the US, it “implies a stock draw . . . of 1 million b/d in the second quarter,” Jakob said Apr. 21. “For April to date, the US has been reducing its stock layers at a rhythm of 800,000 b/d.”

In April of 2009 and 2010, he said, “The US was building stocks. This means that stocks are starting to trend into a deficit to the levels of the last 2 years and are trending towards the 2007 levels. In early February, US total petroleum stocks were 30 million bbl above the 2010 levels; they are now 29 million bbl below (OGJ Online, Apr. 21, 2011).”

Al-Naimi said Saudi Arabia sold 2 million bbl of a special blend of crude meant to replicate the high-quality Libyan oil that was shut in by the revolution in that country, but traders reported demand for the blend was tepid. The minister said there is little interest in increased crude supply because of high prices, maintenance at refineries, and reduced demand from Japan due to the earthquake and tsunami.

In late March, however, Kuwait’s oil minister was quoted by the country’s official news agency as saying many buyers were asking for additional crude. He said Kuwait would not exceed its output quota, despite spare production capacity of 1 million b/d.

At that time, CGES analysts said, “This is the heart of the problem that the oil market faces at the moment. Buyers clearly want more oil from OPEC than it is currently producing, yet those with spare capacity seem to be doing very little.” They projected the world will need 30.3 million b/d of oil from OPEC in the second quarter, “just to keep quarterly oil prices around $110/bbl” (OGJ Online, Mar. 21, 2011).

Moreover, in mid-March Saudi Arabia became involved in what some described as a “proxy war” with Iran when more than 1,000 Saudi troops were dispatched to the small kingdom of Bahrain to help put down demonstrations against the royal family of that neighboring island. A large percentage of the population of both kingdoms is Shia Muslims while the ruling families in both are Sunni Muslims (OGJ Online, Mar. 28, 2011).

Iran and Saudi Arabia are old antagonists, and Iran is reported to be stirring up resentment among Shia Muslims against Sunni Muslims.

Jakob said, “We believe there is a political side to the Saudi Arabia cut in oil production, and if they are trying to barter oil against support for the Bahraini military operation, then we are in a bit of trouble. Saudi Arabia seems today more focused on saving its political regime than saving the world economy.”

At the recent roundtable meeting, Al-Badri told reporters, “We see that there is a $15-20[/bbl] premium risk at this time [because of civil unrest in several oil producing countries].”

But that is a higher premium than market analysts have attributed to oil prices despite various supply disruptions in recent years from the sabotage of pipelines and other oil field structures in Iraq and Nigeria through recent political uprisings in the Middle East and North Africa, including the stalemated revolution that essentially stopped Libya’s production.

Moreover, the Arab League approved in advance the North Atlantic Treaty Organization’s no-fly zone to protect Libyan rebels, knowing Libya’s crude production likely would be disrupted. But some League members were reported later to be having second thoughts.

Like some members of the US Congress, Al-Badri called for “regulations” to curb speculation in oil markets. He also voiced OPEC’s long-standing complaint that high taxes on oil products in the major consumer countries contributes to high petroleum prices.

But at KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said the recent surge in oil prices is part of a wider upsurge in commodity prices—including gold, corn, and copper—that is fuelling inflation around the world.

“Markets enjoyed sufficient supplies of crude and the recent oil price rise had nothing to do with market fundamentals but with the current geo-political situation and speculation,” said Mohammed bin Dhaen Al Hameli, oil minister of the UAE. That country sent 500 police to join Saudi troops in assisting Bahraini King Hamed ibn Isa Khalifa against demonstrators.

Al Hameli said OPEC is in continuous talks with the World Energy Forum and the International Energy Agency to ensure market stability.

Addressing the roundtable meeting, Al-Naimi assured ministers Saudi Arabia is able to fulfill Asia’s future oil requirements. Exports of crude from Saudi Arabia to China have doubled since 2007, and Saudi Arabia is now exporting as much crude oil to China as to the US (OGJ Online, Mar. 23, 2011).

Al-Naimi expects demand for oil to be high in the Asia-Pacific area for decades due to growing population and surging living conditions in developing countries. The Saudi minister said future high demand for oil would be maintained by Asia’s developing markets, while current demand levels among developed nations would remain unchanged.

Contact Eric Watkins at [email protected].