Saudi Arabia Bluffing Over Crude Production Capacity

Saudi Arabia Bluffing Over Crude Production CapacitySaudi Arabia Bluffing Over Crude Production Capacity

Oil market watchers have been keeping a close eye on Saudi Arabia ever since it announced last month that it could very well increase oil production if and when it wanted to, but analysts at Energy Aspects explained on Tuesday that the major oil producer could be calling the market's bluff.

Any increase is unlikely to happen anytime soon, according to analysts at energy consultancy firm Energy Aspects, which published a noted on Tuesday suggesting that there is no reason to fear an imminent change of Saudi policy, CNBC reported.

In fact, Energy Aspects said Saudi Arabia would not even be producing its usual amount of around 10.2 million barrels a day, according to OPEC monthly reports, this month and was unlikely to reach a high of 12.5 million bpd–Saudi Arabia's reported full production capacity, according to Saudi Aramco–by the end of 2017.

"A lot has been happening in the oil market lately. Yet, what has caught everyone's attention amidst this drastic U-turn in balances is Saudi Arabia. Undoubtedly these are uncertain times, but Saudi Arabia will not be producing 11 million bpd this month (especially since it has maintenance) and will not be reaching 12.5 million bpd by end-2017. Oil rigs have been falling and output has been remarkably steady at 10.2 million bpd since August 2015," Energy Aspects' team said in the note.

The research consultancy also stated that any potential increase would not only take time, but would need more oil infrastructure, such as oil rigs, and that markets had generally jumped to conclusions about Saudi Arabia's oil output plans.

"Moreover, Saudi Arabia has made no announcements that it will increase productive capacity. And while it would like to be prepared for a higher call on its crude as non-OPEC supplies fall fast, increasing capacity takes time.

"The 1.5 million bpd increase in productive capacity to 12.5 million bpd took six years to complete, by 2010. Even increasing production and maintaining it at 11 million bpd or higher needs more rigs, much like sustaining output at 10 million bpd required 20 more rigs," it said.

In addition, Energy Aspects said that even the IPO of Saudi Aramco was "fraught with challenges and has hardly generated interest amongst investors … and the lack of institutional capacity to undertake such deep reforms means it takes time to implement such changes, and there will be plenty of obstacles along the way".