Thursday, April 21, 2011

Disquieting Saudi Oil Indicators and the Next Oil Shock

There are a growing number of indicators of concern in Saudi Arabian oil production:

1) According to the Wall St Journal, production sharply declined in March
Saudi Oil Minister Ali Al-Naimi said Sunday that oil production from the kingdom was 8.292 million barrels per day in March, down about 800,000 barrels a day from 9.125 million barrels per day in February. Most estimates, including the monthly report of OPEC—which relies on external databases—had seen a rising or stable production at about nine million barrels a day in March.
If I treat this like an early JODI report, the overall production graph would look as above.  Obviously, it's strange that Saudi Arabia is cutting production at the same time that the world has lost Libyan output.

2) There was a sudden sharp increase in the count of oil rigs in Saudi Arabia in February and March.  Further increases are expected:
Two Saudi officials told Reuters on Tuesday that the extra rig activity would maintain rather than increase the kingdom's oil capacity. It completed a multi-year expansion in 2009 meant to boost spare capacity by more than 3 million barrels per day.

"It's not to expand capacity. It's to sustain current capacity on new fields and old fields that have been bottled up," one of the officials said.
After a long period of declining rig count (indicating Saudi Aramco was not concerned about its ability to maintain desired production levels), the flow of events has turned in the opposite direction.  Similarly,

3) Saudi Arabia has just restarted work on the Manifa project that was put on hold in the aftermath of the great recession:
Halliburton (HAL) reported March 28 that Saudi Aramco, Saudi Arabia's national oil firm, planned to restart its $11 billion Manifa offshore project, delayed since 2009.

Aramco puts the field's reserves at more than 10 billion barrels. It plans 31 artificial drilling islands and 13 offshore platforms. Halliburton is currently contracted for services on 93 wells.
Notwithstanding the additional 950kbd of crude and condensate from Manifa,

4) There are reports of a new paper by a senior Saudi oil official that oil production will not rise in the next five years:
Saudi Arabia expects its oil production to hold steady at an average 8.7 million b/d to 2015, rising to 10.8 million b/d by 2030 and leaving the kingdom with 1.5 million b/d of spare production capacity, a senior Saudi oil official said in a research paper released Wednesday.

Majed Al Moneef, Saudi Arabia's OPEC governor, said in the paper published on the Arab Energy Club website that Saudi output averaged 8.2 million b/d in 2010.
(I can't find an English version of this paper at present).  I note that the previous maximum of Saudi production was 9.5mbd (see graph above), and now Mr al Moneef is saying that they won't even achieve that over the next five years?

All of this evidence points in the direction of Saudi Arabia being unable to raise production much if at all in the near term.  Given a global economic recovery, rapidly growing demand in China and other developing nations, and little hope of a quick resolution in Libya, that raises the odds of a major oil shock a lot.  Some of us have been warning for several years that as soon as the global economy recovered sufficiently, there would be another oil shock.  I started wondering as long ago as December of last year, whether 2011 could be the year?

Look at the price situation already:

If Saudi Arabia is going to have flat or declining production for the rest of the year, then I think the odds of exceeding 2008 prices in 2011 are now quite good.

(My thanks to commenter Datamunger, and TOD commenter Darwinian for drawing my attention to some of these links).


OGKz said...

One additional point which is often overlooked in the media and that is domestic consumption. Saudi Arabia has an exploding population with ever increasing energy demand. Any spare capacity, of which I believe that there is zero, will be consumed by the owner.

The light at the end of the tunnel is getting brighter, but it's not powered by oil.

bordoe said...

Amazing. The US Dollar/Saudi Kingdom "PetroDollar" system really hinges on KSA, and other friendly recyclers, having a steady share of world production of oil, an increasing share if possible.

Given what looks like KSA's inability to continue this, and with increasing internal consumption locking up potential exports; looks like a real crisis in the US Dollar/US Treasury can happen simultaneous with an oil export crisis.

With US government transfer payments now equivalent to 35% of earned wages according to TrimTabs, up from equivalent of 21% in 2000, the effects of forced austerity will be rather substantial.

>social benefits —including Social Security, Medicare, Medicaid, and unemployment insurance—were equal to 35% of all private and public wages and salaries in the 12 months ended January, up from 10% in 1960 and 21% in 2000.

>“We have no quibble with the view that the U.S. economy is expanding at a moderate pace,” says Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “But we believe Wall Street does not fully appreciate the degree to which growth depends on government support.”

This will very likely cause a serious domestic employment crisis.

What a world.

Emil said...

Finally the mildly cornucopian Stuart is dead, long live the new/old Stuart, one which has little time for Saudi excuses and has a far harsher language. We like:)

(An example of the now dead(or so I hope) cornucopian you was this: I hope we won't see that stuff again).

Welcome back :)

Oh, one final thing, do you reckon that we're essentially on the tip of the slope now? Hirsch always said the range was 2012-2015. We're just about there now.

James said...

I wonder how high oil prices need to go to trigger a double dip recession? Economists such as James Hamilton have suggested this last recession was partly if not largely a result of the high oil prices.

Perhaps we will see oil prices riding a saw tooth pattern over the next decade as we lurch from one oil price induced recession to the next.

Stuart - please let me say again how much I like your blog. I am finding myself drawn to Early Warning first ... even ahead of Calculated Risk!

Stuart Staniford said...



I really haven't changed my views that much. In particular, I still think it's more likely than not that Iraqi production is going to increase a lot (I've never said it's certain, and I don't say so now). However, it's going to take a decade or more (as I indicated in the piece you link too), so in the short term, Saudi Arabia is key.

There, the incoming evidence of the last few weeks is causing me to wonder about my prior position that they could most likely go back up to 9.5, and maybe a bit beyond. But that's only a 1mbd shift in views, and I haven't definitely made it yet :-)

Stuart Staniford said...


Perhaps we will see oil prices riding a saw tooth pattern over the next decade as we lurch from one oil price induced recession to the next.

Yes, I think so. How high they have to go now to cause a recession, I really don't know. It's sort of like blowing up a balloon more and more - how big it gets depends on the weakest place in the rubber.

Last time they got to $140ish before the credit bubble burst. If there hadn't been a credit bubble, I guess they would have gone significantly higher till something else broke.

It's pretty hard to know what would break first this time - European sovereign defaults triggering French/German bank failures? US sovereign debt issues? Overheated Chinese bubble bursting? More Middle Eastern revolutions? Or just oil prices getting so high that they trigger a general loss of business confidence. Hard to say...

And thanks for the kind words!

KLR said...

In re: props: I posted that same story about HAL/Manifa here. Assume it made it through moderation, no fackata swear words or links to P0rn. ;) An obvious leading indicator for the rig count.

OM says drop is due to spring maintenance: OPEC Exports Decline as Seasonal Demand Dips, Oil Movements Says - Bloomberg

“We’re seeing the low point of the second quarter, of the spring refinery maintenance season and its effect on demand,” Oil Movements founder Roy Mason said in an interview from Halifax, England. “Nothing much is going to happen until the end of next month, when we’re starting to look at summer and demand for long-haul cargoes will rise.”

Saudi Arabia’s Oil Minister Ali al-Naimi said April 17 that the global “market is oversupplied” and that the kingdom cut supply by more than 800,000 barrels a day. Brent crude for June settlement traded at about $124 a barrel in London today, having reached a 2 1/2-year high of $127.02 a barrel on April 11.

Sound good? IEA mentioned this in the OMR from the 12th, too. Whether this is an exceptional drop for this time of year would be the obvious lead to follow.

I just did YOY for consumption Dec-Feb via JODI and all nations in the Top 30 are up, even in the EU OECD; excepting Iran and Turkey being mildly down. US and China's vigorous growth barrels past all of these, of course. Latest reports on Chinese attempts to take steam out of their economy suggest failure, too. Will be interesting to see if they ever visit <10 mb/d in the coming months.

Greg said...

Interesting times!

If policy-makers decide that we have now moved into an era of sustained oil scarcity, they could increase efforts to substitute away from oil. The most direct, quickest-to-implement substitutes (from a policy-maker's perspective) are biofuels. So we could well see an increase in the rate of growth of biofuel production as a share of global food utilization. High oil prices, defaults, and bursting bubbles could be relatively minor problems if policy-makers jump the wrong way on this.

Sorry to be a one-note Johnny on biofuels, but I think that people in general don't yet appreciate the degree of linkage between oil and food prices, because the biofuel link is so new.

Stuart Staniford said...


The Saudi's always claim there's no demand when prices are through the roof, but they can't/won't increase production. There'd be more demand if they'd sell the oil cheaper....

Stuart Staniford said...


Yeah, I share your concern.

Jack Boyer said...

Looks like we will all need to work from home more if possible. See my blog article on cloud computing and working from home.

Jack Boyer

Unknown said...

Another story on the Saudi's cutting oil production. I would maintain that no matter what the reason, it doesn't really matter. Either they are cutting because they want to, or they can't produce more, the end result is that there is less oil to use. Not good for the world's economy.

bordoe said...


The Oil Drum's well known Jeffery Brown has a comment on the Times website breaking the situation down.

I believe he's the second comment.

It's kind of sad (but now totally expected) that the comment section has better analysis, information and background than the article.

bordoe said...

KLR >Latest reports on Chinese attempts to take steam out of their economy suggest failure, too.

You might want to see the latest property transaction volume data.