Supply Fears Raise Questions Over Spare Capacity

BMI View : Potential disruption to Iraq's crude production and exports in light of militant attacks has led to concern over Saudi Arabia's ability to substitute potential outages. We believe that given the tight oil supply market and decreasing Saudi spare capacity, its capability to act as a successful swing producer is increasingly limited.

The situation in Iraq has brought to light the question of Saudi Arabia's ability to uphold its role as the world's swing producer in times of oil supply disruptions. While our core view remains that there is no immediate threat to Iraqi oil supplies from attacks by the Islamist militant group ISIS ( see, 'No Immediate Threat To Oil Supply', June 17), the crisis has led to questions over possible supply outage from Iraq and Saudi Arabia's ability to fill the gap.

As OPEC's largest producer and with the world's greatest spare oil production capacity, Saudi Arabia has historically been the swing producer within OPEC, acting as the world's back-up supplier in times of unplanned supply outages. The country has been able to increase or lower its production in response to unexpected variations in the oil demand and/or supply.

Increasing OPEC Outages Sees Tightening Oil Market
Estimated OPEC Unplanned Outages (mn b/d)

Supply Fears Raise Questions Over Spare Capacity

BMI View : Potential disruption to Iraq's crude production and exports in light of militant attacks has led to concern over Saudi Arabia's ability to substitute potential outages. We believe that given the tight oil supply market and decreasing Saudi spare capacity, its capability to act as a successful swing producer is increasingly limited.

The situation in Iraq has brought to light the question of Saudi Arabia's ability to uphold its role as the world's swing producer in times of oil supply disruptions. While our core view remains that there is no immediate threat to Iraqi oil supplies from attacks by the Islamist militant group ISIS ( see, 'No Immediate Threat To Oil Supply', June 17), the crisis has led to questions over possible supply outage from Iraq and Saudi Arabia's ability to fill the gap.

As OPEC's largest producer and with the world's greatest spare oil production capacity, Saudi Arabia has historically been the swing producer within OPEC, acting as the world's back-up supplier in times of unplanned supply outages. The country has been able to increase or lower its production in response to unexpected variations in the oil demand and/or supply.

However, the country's ability to fully replace Iraqi production is uncertain, at best.

Several unplanned outages have left the global supply picture in a dire condition over recent years. Notably, continued supply outages in Libya and Nigeria, a smaller ramp-up in Iraqi production than previously expected, combined with production shutdown in Kashagan have left a disappointing supply picture. Supply outages in OPEC alone accounted for about 2.6mn b/d of oil being offline in May 2014.

Increasing OPEC Outages Sees Tightening Oil Market
Estimated OPEC Unplanned Outages (mn b/d)

Combined with healthier-than-expected demand on the back of an improving global economy, the oil market has been particularly tight over past months. As a result, Saudi Arabian production rebounded from lows of 9.1mn b/d in Q113 to average a historically elevated 9.7mn b/d average for the year, reaching record peaks of over 10mn b/d in August 2013.

Given this context, Saudi Arabia would have difficulties to replace oil outages from another large oil producer. The country has often stated that it has a spare capacity of between 2-2.5mn b/d, with the capability to ramp up its production to about 12.5mn b/d in the event of unexpected disruptions elsewhere.

However, it is very unlikely that the country could pump at these levels for a sustained period of time. This has been supported by recent comments by Gulf officials at OPEC, which stated in the midst of Iraqi supply fears that Saudi Arabia could ramp-up output by another 1mn b/d-1.3 mn b/d in a best case scenario, as cited by The Wall Street Journal. Officials mentioned that production of 11.5mn b/d is untested, and could only be maintained for a very short period. Higher production would be very difficult and would require producing heavy crudes.

In addition, we have often noted that the country's rising domestic consumption, notably to power its growing electricity generation networks and transport sector, has been eating into the country's crude export potential. Despite Saudi Arabia's heavy focus on developing its gas resources to support its crude export growth, we expect that the slow development will be insufficient to offset rampant growth in demand for electricity leaving a heavy reliance on oil ( see, 'Unconventional Projects To See Slow Progress,' June 5).

Combined with growing electricity demand, Saudi Aramco's aggressive downstream expansion will put further pressure on domestic consumption in the coming years. We forecast average oil consumption growth of 7% per year across our ten-year forecast period. This compares to average oil production growth of just 1% (albeit from a higher base), over the same period. This has already and will continue to progressively reduce the country's spare oil production capacity.

Limited Room For Export Growth
Saudi Arabia Non-Refined Net Exports (000b/d and % y-o-y), 2003-2023
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

×

REQUEST A DEMO

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

Thank you for your interest

A member of the team will be in touch shortly to arrange a convenient time for your free demonstration and trial. If your enquiry is urgent, please email our Client Services team here.