A Candid Admission About Saudi Oil Production

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For some months now, it has become increasingly likely that Saudi Arabian oil production is past its peak. The signs were already there for those reading between the lines in the days after the Libyan civil war broke out. At that time, Saudi Arabia stated that it had “already” increased production to 9 million barrels per day and could do no more. If Saudi production was maxed out at 9 million barrels per day then, down from the previous highs of 9.5 mbpd, this indicated that maximum production rates were falling. Incidentally, the Kingdom passed peak net exports in 2005, due to a combination of a production plateau and soaring domestic consumption.

The following article in Reuters, released on April 17, 2011, unless it is some kind of error, confirms without a doubt, that Saudi Arabia has entered a production decline. Indeed, it suggests a decline that may be precipitous. In case you missed this article, you may want to sit down before reading further.

Saudi slashes oil output, says market oversupplied

(Reuters) - Saudi Arabia's oil minister said on Sunday the kingdom had slashed output by 800,000 barrels per day in March due to oversupply, sending the strongest signal yet that OPEC will not act to quell soaring prices.

Let’s get this straight. Libyan production of light sweet crude is down nearly a million barrels per day beginning in late February and the price of Brent crude has rocketed to $120 per barrel. Saudi oil ministers, however, say the market is “oversupplied.” As a response to the loss of 900,000 bpd of Libyan crude, it has made further cuts of 800,000 bpd for a total net loss of production of 1.7 million bpd. It might be noted that global consumers typically need an additional 200,000 bpd each month due to the growing global economy. Thus, the total net deficit for the month was 1.9 million bpd.

What can you say other than, “Wow!”

As a result of this massive supply shortfall, crude oil and product prices have been rising rapidly. Yet somehow we are to believe that these cuts were made because the market is “oversupplied” with product. The Energy Information Agency has reported petroleum and refined product stockpile draw-downs in the US over the past six weeks averaging some half a million barrels a day. Thus, domestic refiners are drawing down their stocks rather than pushing prices higher and just hoping (perhaps praying as well) that import prices moderate due to some miracle in Libya or a surge in production somewhere in the rest of the world.

Yikes, indeed!

To return to the Reuters’ article:

Consumers have urged the exporters' group to pump more crude to put a cap on oil, which surged to more than $127 a barrel this month, its highest level in 2 1/2 years amid unrest in North Africa and the Middle East.

Oil Ministers from Kuwait and the United Arab Emirates echoed Saudi Arabia's Ali al-Naimi's concerns about oversupply and said rocketing crude prices were out of the hands of OPEC, which next meets in June.

What are we to make of this statement? The market is oversupplied, and yet prices continue higher. “It is out of our hands.” Honestly, I think that is as clear a statement as you will get that every OPEC nation is pumping full-out. Let the cards now fall where they may.

"The market is overbalanced ... [overbalanced?] Our production in February was 9.125 million barrels per day (bpd), in March it was 8.292 million bpd. In April we don't know yet, probably a little higher than March [we hope]. The reason I gave you these numbers is to show you that the market is oversupplied," Naimi told reporters.

Let me translate for you. “Our output has fallen a million barrels per day in the midst of a supply disruption due to the Libyan war, and prices continue to rocket higher. Either we are ourselves past peak, or we are intentionally engineering a phenomenal price spike to generate astronomical revenue with which to keep the King’s subjects happy so they don’t revolt. To those in the West, please remember that we are, still, your allies.”

Two Saudi-based industry sources told Reuters last week the kingdom had cut output due to poor demand, prompting selling by traders who saw it as a sign of a well-supplied market.

But crude rebounded later in the week on optimism about the state of the U.S. economy.

Again, is it just me, or does the increase in the price of Brent crude steadily from $90 to $125 signal some sort of “poor demand” in the market? The OECD economic numbers are still coming in relatively strong. We are not yet back in recession, and OECD refined product consumption continues to rise.

China just announced industrial production up some 15% year over year and 10% year over year increases crude oil demand. So, where precisely is this “poor demand?” I fear we have truly entered a “Never-Never Land of Post-Peak Oil Spin-Control.”

To continue with the article:

Naimi's words are the clearest indication yet that OPEC is unconvinced there is a need for more oil despite the civil war that has slashed Libyan output and expectations [that] Japanese demand will rise as it scrambles to rebuild its earthquake-shattered electricity grid.

"These statements underscore the breadth of the security premium currently in (oil) prices. Overall supplies are sufficient," said John Kilduff of energy hedge fund Again Capital. "As we've seen in the past, however, a well-supplied market is not always a barrier to very high prices."

Somehow, this counts as “news” for Reuters. Thankfully, we have Financial Sense, the Big Picture and the excellent contributors to this site to bring us a rational understanding of what is happening. For “OPEC is unconvinced there is a need for oil,” please insert, “OPEC is helpless to produce more oil because Peak Oil has passed, and indeed Saudi Arabia itself is in decline.” For “supplies are sufficient,” and “a well-supplied market is not always a barrier to very high prices,” please insert, “Yes, the OECD can live off its inventories for a while, but not for that long, so very likely, higher prices are coming.”

The article continues:

Naimi, who has previously spoken of $70 to $80 a barrel as a desirable range for crude, declined to comment on the price.

Uh, what could he possibly say?

Oil prices fell early last week on concern that demand may be eroding under pressure from high prices, but rebounded on Friday following encouraging U.S. economic data.

Nobuo Tanaka, the head of the International Energy Agency, which represents oil importers' interests, stopped short of saying OPEC needed to boost output, but suggested the group be more flexible in its thinking about supply.

"The market is getting tighter and if it is tighter the price may go up, which may have a negative impact to economic growth," Tanaka told reporters.

Translation: “We at the IEA have stated that conventional crude oil peaked in 2006. We realize that OPEC can do nothing at this point except for ‘be flexible,’ whatever that might mean. Due to Peak Oil, oil prices are likely going to go up until they crush the global economy which will hurt demand, after which time prices will go down.”

But wait, it gets even better:

OPEC last formally discussed output policy in December and is not scheduled to do so again until June. Members have ruled out holding an emergency meeting before then.

Why hold an emergency meeting when everyone is pumping full-out? What would be the point, except to call even more attention to the fact that OPEC is powerless to restrain prices?

Unrest in North Africa and the Middle East has left Saudi Arabia and other Gulf nations nervous of political instability and of a sharp fall in oil prices that could lead to a fiscal crunch while populations are restive.

This is crazy. If OPEC truly desired to avert a sharp fall in oil prices, then it would pump more oil now while prices are not yet high enough to crush the global economy but at a level sufficient to sustain substantial transfer payments to its subjects. OPEC, however, is claiming that it is doing precisely the opposite, “cutting” production while prices continue to climb to dangerous levels.
My conclusion: I would suggest that there can be little doubt that the production cuts are not voluntary and that the Gulf States, including Saudi Arabia, are in decline. Peak oil occurred in 2005 and 2008 as predicted. Matthew Simmons was right. Dr. Hubbert was right. CERA and Saudi Aramco were wrong. Simple, no?

If there is another rational interpretation of this article and the statements contained in it, I would love to hear it. But ultimately, it just doesn’t matter. If Saudi Arabia is in fact cutting production by 800,000 bpd now, in the face of rising global prices and the nearly total loss of Libyan production, something is terribly, terribly wrong.

Either way, oil prices will spike to $180 or $200 per barrel. If this is not, in fact, Peak Oil, it will be very nearly indistinguishable from it, and it won’t matter much one way or the other.

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About Kenneth D Worth

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