Friday, June 10, 2011

Saudi Arabia to Produce 10mbd in July?

At the end of April, I noted this WSJ quote:
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.
Ok. So here we have the Wall St Journal - premier business newspaper in the world - quoting the Oil Minister of Saudi Arabia, as to the level of Saudi oil production.  With three decimal places, four significant figures, no less.

You ought to be able to rely on that, right?  Mr al-Naimi must know how much oil his fully nationalized oil industry produces.  And the Wall St Journal surely wouldn't make an error in reporting his words.  And even if you didn't believe the Murdoch-owned conservative WSJ, you have the left-leaning SF Chronicle reporting the same thing.  And clearly, if they are giving three decimal places, it's not some off-the-cuff remark.  He must have spoken with some precision from notes, or given a printed handout or the like, to mention both months with four significant figures each.  So it must be true, right?

Having watched Saudi Arabian oil developments for quite some time, I have become cynical and jaded, and so I noted:
At the time, the OPEC Monthly Oil Market Report ("based on secondary sources") showed 8.961mbd in March, versus 8.904 in February.  Today, I checked the IEA, which have now released the detailed tables for March, and they also show flat production of 8.62mbd in March, exactly the same as the 8.62mbd in February.

So, for whatever reason, the international agencies do not seem to be accepting the idea that Saudi Arabian production dropped sharply in March.  It will be very interesting when the JODI number comes out.  That is based on Saudi Arabian self reports, and it will be intriguing to see if official Saudi reports of their production bear any relationship to what the oil minister says to the press.
Well, indeed JODI has now produced the numbers for March.  Here they are:

So, the Kingdom of Saudi Arabia reported to the Joint Oil Data Initiative that it produced 9.020mb/d in February, and 8.655mb/d in March, a fall of 365kb/d.  This is in sharp contrast to Mr al-Naimi's statement that the Kingdom's production dropped by 833kb/d between February and March.

So what is one to conclude?  When the Saudi oil minister speaks to the world's business reporters, one cannot rely that his words will later match the kingdom's official reports to international statistical agencies.  Whether through sloppiness or otherwise, at least one of Mr al-Naimi's statement and the Saudi report were in error to the tune of almost half a million barrels a day -- more than five percent of production -- at a time when oil markets are critically seeking signals of Saudi intentions and capabilities.

So today, Clifford Krauss in the New York Times reports as follows:
In the wake of an unruly OPEC meeting, Saudi Arabia has decided to go it alone and raise production substantially in the coming weeks to meet rising global demand.

The Saudi newspaper Al-Hayat reported on Friday that oil officials there had decided to increase production to 10 million barrels a day in July, from 9.3 million barrels, with most of the additional output going to China and other growing Asian economies.

Saudi oil officials did not comment on the report, but the fact that they did not deny an article that appeared in the tightly controlled Saudi press was taken by analysts as confirmation.

The price of a barrel of light sweet crude dropped by nearly $2.50 to below $99.43 a barrel in Friday trading, returning to the level that existed before the OPEC meeting in Vienna this week that ended in disarray, with delegates refusing to raise official production levels.

The Saudi move, which was not unexpected, shows that Saudi Arabia will try to counteract any shortages in the market arising from the turmoil sweeping through North Africa and Middle East.

The fighting in Libya has taken 1.3 million barrels off the world market, and the turmoil in Yemen and Syria has subtracted an additional 300,000 barrels.

“The Saudis are showing they can take unilateral action,” said Andrew Lipow, a former Amoco trader who is president of his own consulting firm. “It will show the markets that the Saudis are serious about tempering further increases in price.”
I wonder.  If the plain words of the oil minister cannot be relied on, are anonymous sources quoted in the Saudi press to be relied on a-fortiori?  And when did Saudi Arabia pay much attention to its quota?  And if it was willing and able to increase production to 10mbd, why not do it in March, when Libya went off line?  I note that there is rather a history of what appear to be Saudi public relations exercises that get repeated by gullible journalists.  By the time the statistics come out a month or two later, they will have forgotten all about it and will never correct the record. Just like they never corrected the record for what Mr al-Naimi said about March production, and before that, very few corrected the earlier press reports that Saudi Arabia had increased oil production to compensate for Libyan losses.

So I guess I'll reserve judgement on that 10mbd until we have all the international agencies publishing numbers that say it really happened.


James said...

I was going to write something paranoid about major journalists being on the payroll of intelligence agencies closely allied with KSA ... but I am reading Michael Lewis' 'The Big Short' right now, and it is making abundantly clear to me yet again that one should not attribute to malice that which is just as easily explained by stupidity. Of course, it is also making clear that malice and stupidity thrive in each other's presence.

buck smith said...

Historically Saudi behavior wrt production and oil prices have been explained by greed and fear. The greed is the desire to get the best price for their oil. The fear is that high prices will bring other supplies on to the market whether of oil or alternatives to oil. The politics of the Arab spring rebellions probably add several other motivations into the mix. The rebellions are triggered by high prices for food and the key driver in high prices for food is high prices for oil. There is also competition with Iran for leadership and control of the rebellions, influence with other governments in the region. Interesting times for the Saudis and all of us.

Stuart Staniford said...


My guess here is that we are seeing an attempt to intimidate the Iranian's, and that it's a complete bluff. I'm not certain, however.

Frugal said...

I believe you need to use psychology to undertand what the Saudi's are saying about their production or reserves. Using logic alone doesn't work.

Fuzzy, inconsistent, and ever changing numbers are a strong indication that they're withholding critical information. I have personally heard the same type of language during relationships that weren't working out very well. On every one of these occasions, the other half of the partnership was later found to be withholding critical and damaging information.

In my opinion, the more inconsistent the story, the greater the likelyhood of a lie being told. I'm not sure if any research papers on this topic exist.

Stuart Staniford said...

Frugal: That would be consistent with the idea that they not only are they overstating their reserves and their spare capacity, but in fact are having to struggling to maintain production at present levels until they ramp up the rig count again.

Manolo said...

Well, well, 10mbd on a sustained level for several months or more ?

Sorry could not restrain myself... :-)

Anyway, always a pleasure to read you,Stuart

Stuart Staniford said...

Manolo: :-). We shall see...

Manolo said...

BTW, the spread WTI / Brent is getting ridiculous (almost US$ 20, but nobody seems able to take advantage and ship oil out of Cushing, despite a transport cost (I was told..) of less than US$12./barrel
Your thoughts ?

buck smith said...

I think the WTI / Brent spread is getting cleared by US refiners exporting gasoline and making some nice, fat margins. ;)

Manolo said...

Interesting take here: