Saudi Arabia has a response to the global surplus of oil: Raise output to near-record levels and then pump even more.
The world’s biggest oil exporter, having abandoned last year its role of keeping global markets in balance, now has incentive to maximize output and undermine rival producers by using its reserve capacity, according to Citigroup Inc. and UBS AG, Bloomberg reported.
The increase will heighten tensions when the organization meets in June. Oil plunged to a six-year low near $45 a barrel in January, six weeks after the Saudis overcame opposition within the group to keep up output despite surging US shale supplies.
The biggest member in the Organization of Petroleum Exporting Countries (OPEC) boosted output to 10.1 million barrels a day in March, close to an all-time peak, the International Energy Agency reported. Saudi Oil Minister Ali Al-Naimi, who has stressed that his country won’t cede market share to higher-cost producers, said in the capital Riyadh on April 7 that production was at 10.3 million barrels and would remain close to that.
“The implication of the ‘use it all and use it now’ strategy is that they will continue to ramp up production to 11 and possibly beyond,” said Kleinman of Citigroup. The output decision was “forced upon them” by the runaway growth of US shale, which threatened to erode their market share, Yusuf Alireza, chief executive officer of commodity trader Noble Group Ltd., said at a conference in Lausanne, Switzerland, on April 21.
Refusing to cut has already been effective in slowing growth in US shale. The IEA, the Paris-based adviser to 29 developed economies, forecasts that non-OPEC supplies, led by the US, will expand by only 630,000 barrels a day in 2015, down from a projection of 1.3 million a day in November. The outlook for demand suggests the Saudis will keep production at “elevated levels,” said Miswin Mahesh, an analyst at Barclays Plc in London.
The extra crude won’t necessarily weaken oil prices because it will be consumed locally rather than shipped abroad, said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. Price increases for Asian customers indicate the country isn’t trying to push supplies onto consumers or capture market share, he said. Fellow OPEC members keep calling on Saudi Arabia to reverse course and curtail supplies. The organization’s 12 members will next meet in Vienna on June 5.
OPEC should trim “at least 5 percent” from its output target of 30 million barrels a day, Iranian Oil Minister Bijan Namdar Zanganeh said on April 14. Iran, suffering from both the collapse in crude prices and international sanctions on its exports, needs an oil price roughly double current levels to cover government spending this year, the International Monetary Fund estimates.
Brent crude futures rose 53 cents to $65.38 a barrel on the London-based ICE Futures Europe exchange on Friday. The contract has lost 44 percent since June.
