Crude oil prices jumped a percent today on comments from Saudi Arabia’s Energy Minister Khalid al-Falih, who said he expected the OPEC+ production cut deal would be extended into next year.
Speaking to Reuters, Al-Falih said “We still have some time to go before we bring inventories down to the level we consider normal and we will identify that by mid-year when we meet in Vienna. And then we will hopefully by year-end identify the mechanism by which we will work in 2019.”
Global oil stockpiles are down considerably from their bloated state two years ago, but this seems to not be enough for some participants in the deal, apparently. There have already been warnings—from the IEA, no less—that with Venezuela’s steady oil production decline, the market could even swing into a deficit before the year’s end—and that’s despite the booming shale oil production in the United States.
It could be that Saudi Arabia wants to see a deficit, which would no doubt push prices up above US$70 a barrel, maybe even to US$80. That’s the price level that, according to Bloomberg Gadfly’s Liam Denning, Aramco needs in order to get the US$2-trillion valuation eyed by Riyadh. Related: What Trump’s Tariffs Mean For Global Oil And Gas
At the time of writing, Brent crude was trading at US$69.70 a barrel, with West Texas Intermediate at US$65.13, with some investment banks already predicting further jumps.
The geopolitical situation is certainly suggestive of such jumps. China has just responded to President Trump’s latest tariff plan against Chinese products, and while the response has been measured—US$3 billion worth of tariff-liable products vs US$60 billion—it may not be the last we hear from Beijing on the topic.
Trump has also appointed John Bolton as his new national security advisor, and this appointment, coming so soon after the replacement of Rex Tillerson with Michael Pompeo, has reignited fears of a more aggressive U.S. stance against Iran, with some even suspecting another war being planned in the Middle East.
All these developments are certainly bullish for oil, but Saudi Arabia is not OPEC’s only member, and it remains an open question whether everyone will be on board with yet another extension, especially with prices still on the rise.
By Irina Slav for Oilprice.com
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A report by Citigroup has warned that Saudi Arabia could run out of oil to export by 2030, raising fears that oil prices may rise significantly in coming years.
For what it's worth, I wrote my first net oil exports article, suggesting that Saudi Arabia was on the verge of a decline in net oil exports, in early 2006, as Saudi Arabia was showing a very strong rate of increase in net exports (from 2002 to 2005).
Note that Saudi net exports have been below their 2005 rate for 11 straight years, through 2016 (2017 data not yet available).
Following is my essay comparing Saudi Arabia, circa 2005 to 2016, to the Six Country Case History, circa 1995 to 1999:
The Six Country Case History (the major net oil exporters, excluding China, that hit or approach zero net oil exports from 1980 to 2010), in the time period from 1995 to 1999, and Saudi Arabia, from 2005 to 2016, were both characterized by rising production and rising consumption, with a declining ECI Ratio (ratio of production to consumption) and declining net exports of oil, relative to 1995 and 2005 respectively.
The following chart shows normalized post-1995 values for the Six Countries, through 2002:
Based on the observed initial rates of declines in the respective ECI Ratios (1995 to 1999 for the Six Countries and 2005 to 2016 for Saudi Arabia), Six Country estimated post-1995 CNE (Cumulative Net Exports) were 18 Gb (billon barrels, total petroleum liquids) and Saudi estimated post-2005 CNE were 60 Gb. In both cases, these extrapolations basically assume a perpetual rate of increase in production.
Of course, Six Country production subsequently fell, after 1999, and post-1995 CNE were only 7.3 Gb, about 40% of what the initial (1995 to 1999) projection showed. This has obvious implications for remaining Saudi CNE, when the inevitable Saudi production decline kicks in.
Note that given a finite remaining volume of Saudi CNE, it’s not whether, but to what degree, that we are seeing an accelerating rate of depletion in remaining Saudi CNE.
In any event, it’s important to remember that the actual post-1995 CNE for the Six Countries were only 40% of what the initial estimate showed, using the same methodology that I’m using for Saudi Arabia.
Saudi Arabia's population increased from 25 million in 2005 to 32 million in 2016, as their total liquids consumption increased from 2.2 million bpd in 2005 to 3.9 million bpd in 2016. Their net exports fell relative to 2005, even as production increased, because the increase in their consumption outpaced the increase in production. And note that the ECI Ratio extrapolation for Saudi Arabia in effect assumes a perpetual rate of increase in production. Given an inevitable production decline, their net export decline rate will really kick into high gear once they see a sustained production decline.
In any case, if we divide estimated post-2005 CNE at the end of 2005 by 2005 population and estimated remaining post-2005 CNE at the end of 2016 by 2016 population, estimated post-2005 Saudi CNE at the end of 2005 were 2,400 BO per capita and remaining estimated post-2005 CNE at the end of 2016 were 900 BO per capita.
For the sake of argument, if we assume that the Saudis sell their remaining CNE for about $75 per barrel, they would generate about $70,000 per capita from selling their remaining estimated total volume of CNE.
Following are links to Six Country and Saudi graphs showing their respective ECI Ratios and annual net exports for 1995 to 2007 and 2005 to 2016 respectively.
For posting, it really is a big deal, thats the Kingdom telegraphing higher oil prices.
The markets have been in deficit for two years which is why we have been taking oil out of inventory. What will happen when we do reach this “acceptable inventory” level according to OPEC? Will they just ramp up production at that point? Everybody seems to believe that OPEC/Russia is eager to ramp up without looking at their ability to sustainably increase production. They could do it for a short time(which they did before the production cuts) but they are close to producing flat out right now without hurting the integrity of their fields. Additionally…why would they want to increase production if oil prices are going up?
Typical response: Hedge fund managers pour long positions into WTI through algorithmic trading, along with other oil bulls who for some reason feel obligated to literally be the ones that make these prices move up to the desired positions for OPEC.
Surprised? No...it's so easily predictable I'm not sure why we even have a market anymore when prices seem to be forbidden by some international law from ever going down, despite record U.S. production and weekly increases in rig counts.
Bitter much? I'm not happy but I'm not bitter...I could have also profited from this move by "riding the wave" as in "the trend is your friend...ride its coat-tails!" but I choose not to partake in being one of the traders who pushes prices to less-than-affordable levels for everyone else.
Besides, it doesn't matter...in May prices will continue to soar on upcoming OPEC meeting news (but what news? Hasn't this 'news' which is already expected going to be priced in before said meeting?) And what's more: As the U.S. dollar continues to decline, $70/bbl on WTI still won't be enough for the Kingdom of Saudi Arabia--just watch and see!
Saudi Arabia and Russia, the architects of the agreement, not only want to extend their cooperation well beyond 2018 but they also want to enshrine their cooperation in a permanent format which will enable them to respond quickly in the future to tightening oil market or to a build in global oil inventories.
The objective is not only to see a deficit in the global oil inventories but also to put an end to manipulations of the oil prices by the EIA through claims about rising US oil inventories. May be that explains OPEC’s curbing of crude oil exports to the United States.
Saudi Arabia is keen on oil prices ranging from $70-$75 a barrel this year and probably higher than $80 in 2019. Saudi Arabia ultimately wants oil prices to go beyond $100 in order to balance its budget. The same economic logic applies to the majority of the OPEC producers. This has nothing to do with the IPO of Saudi Aramco. I am on record saying for the last three months that Saudi Arabia will eventually withdraw the IPO altogether because it does not need it any more.
Naturally the escalating global tensions in relation to the Iran nuclear deal and the trade war between China and the United States are giving a helping hand to oil prices. The appointment of John Bolton who is known to be an extreme neoconservative, does not bode well for the Iran nuclear deal or the civil war in Syria. He will egg President Trump to start a war with Iran or get the United States more involved military in the Syrian quagmire with destabilizing impact on the whole Middle East and the world at large. Should this happen, the United States will find itself ill-prepared to handle the situation and will pay a very heavy price for its involvement.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London