Wednesday, January 18, 2012

The Significance of the Al-Naimi Price Comment

Recently, Saudi oil minister Ali al-Naimi made some interesting comments to CNN about Saudi spare capacity:
I believe we can easily get up to 11.4, 11.8 (million barrels a day) almost immediately, in a few days, because all we need is to turn valves," Saudi Oil Minister Ali al-Naimi told CNN's John Defterios. "Now to get to the next 700 or so, we probably need about 90 days."

When asked about whether Saudi Arabia could make up for Iran's exports of 2.2 million barrels a day, al-Naimi said the country has a spare capacity "to respond to emergencies worldwide, to respond to our customer demand, and that is really the focus. Our focus is not on who drops out from production, but who wants more."
and oil prices:
"Our wish and hope is we can stabilize this oil price and keep it at a level around $100" for the average barrel of crude, al-Naimi said.
A good deal of attention has been paid to the second comment since previously the Saudis had said they were comfortable with an oil price of around $75.

Kevin Drum is sceptical of Mr al-Naimi:
This is a bit of a pet peeve of mine, so I'd like to offer an alternative explanation. Here it is: Neither the Saudis, nor anyone else, control the price of oil anymore. Saudi Arabia has very little spare capacity to speak of, and couldn't open the taps to bring the price of oil down even if it wanted to. So no matter what the price of oil is, that's approximately the price the Saudis say is fair. That way they don't have to admit that they no longer have the ability to seriously affect oil price movements.

This, by the way, is the same dynamic at work in OPEC meetings. They meet, they talk, and then they release a statement saying that they aren't going to increase production quotas because the current price is fair and "customers aren't asking for more oil." Well, of course they aren't. By definition, customers aren't asking for more oil as long as oil is selling at the market-clearing price. Which it is. Because if it's not, then the price goes up, and guess what? Markets clear and customers aren't asking for more oil. Nonetheless, this charade regularly gets played out anyway, because OPEC doesn't want to admit that their production quotas are mostly meaningless these days. With occasional exceptions (when the 2008-09 recession temporarily cratered oil demand, for example) OPEC countries are all pumping flat out and couldn't deliver much more oil if they tried.

Bottom line: be suspicious of any explanation that suggests OPEC or Saudi Arabia or anyone else "wants" oil prices to be at a particular level. There was a time when they really did, and when their opinions mattered. But that time is long gone.
Now I generally yield to no man when it comes to skepticism of Mr al-Naimi.  And I continue to wonder why, if Saudi Arabia can just turn the valves to 11.8mbd, it was apparently not producing 10mbd when Mr al-Naimi said it would late last year.

However, I do think his comments might have one point of significance.  If you are betting on oil prices falling at the moment (for example if you judge that a European recession and a Chinese slowdown will put a crimp in demand), then you've got to be very aware that during the last recession Saudi Arabia (with a few key OPEC allies) cut production sharply at the end of 2008:


in order to support prices:


After falling as low as $40 in the aftermath of the financial crisis, the Saudi production cuts brought them back to around $70 give or take - fairly consistent with the $75 that King Abdullah had said was a fair price in November 2008.

So, now, in betting against oil prices you'd have to worry that the one power Saudi Arabia does have is to make sure that oil prices don't go far under $100 for very long.  Since Brent is about $110 as of this writing, that leaves a lot more room for it to increase than to decrease.

6 comments:

barath said...

The irony is that by Saudi Arabia supporting prices in this way, they're helping the world transition away from oil. Their actions help dampen longer-term price swings and keep prices high enough to force investment into alternatives and efficiency. Last year I kicked around the idea of using the SPR to dampen price swings, that wouldn't have worked all that well. Saudi Arabia is in a much better position to do it.

Kenneth D. Worth said...

I think they went even further in 2009 and called 75 to 85 dollars a "target price range." After this time, of course, Brent went to $120, and the supposed 11.4 mbpd was nowhere to be seen. It's not like they have been drilling like crazy in the meantime, so it is thus not at all clear where the 11.4 mbpd would come from now.

The sideways move in prices in 2011 in the face of increased production would seem to indicate higher prices ahead in 2012, especially if production cannot be increased further.

Thanks, Stuart.

Unknown said...

"And I continue to wonder why, if Saudi Arabia can just turn the valves to 11.8mbd, it was apparently not producing 10mbd when Mr al-Naimi said it would late last year."

I do believe you spoke a bit too soon:

10.047 million barrels a day in November

Don said...

"I believe we can easily get up to 11.4, 11.8 (million barrels a day) almost immediately, in a few days, because all we need is to turn valves," Saudi Oil Minister Ali al-Naimi told CNN's John Defterios.

Hmmm, where does he say pump? All I see is "open valves"...like valves to storage tanks? Maybe the "next 700" is spare capacity? I of course realize that their storage is limited but his answer is technically not deceitful (although typically misleading) if they ramp up storage "production".

buck smith said...

I acceptyour point KSA and a price drop. But demand can still fall. In china for example. And production outside KSA can grow.

Stuart Staniford said...

Unknown - interesting news indeed! My first instinct is it's unusual for JODI to be this up to date in posting stats - but I'll have to check my records to be sure one way or the other.