Is it any wonder everyone's confused? Saudi's boost output ...

From Bloomberg, June 10, 2011:

Crude oil tumbled the most in four weeks after al-Hayat newspaper reported Saudi Arabia will raise oil production to 10 million barrels a day next month. Source: Bloomberg

 

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June 8 (Bloomberg) -- Fadel Gheit, an analyst at Oppenheimer & Co., talks about the outlook for Organization of Petroleum Exporting Countries' oil production. OPEC ministers were unable to reach a decision on production quotas at their meeting in Vienna today. Gheit speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Saudi Arabia signaled it’s ready to deliver on a pledge to boost the supply of oil after the collapse of OPEC talks two days ago.
The world’s largest oil exporter will increase production, though it’s too early to say by how much, a Saudi industry official with knowledge of the matter who declined to be identified said today. Al-Hayat, citing senior officials, reported earlier that the kingdom will boost output to 10 million barrels a day in July from the current 8.8 million. Oil fell as much as 3.3 percent, the most in three weeks.
Saudi Arabia “wants everyone to understand that they’re serious,” Olivier Jakob, an analyst at Petromatrix GmbH in Zug, Switzerland, said today by phone. “It’s important that the Saudis are signaling that they’re offering additional barrels.”
The June 8 meeting of the Organization of Petroleum Export Countries broke down after six nations led by Iran opposed a Saudi plan to replace lost output from Libya and aid the U.S. economic recovery, Saudi Oil Minister Ali al-Naimi said on the day. The kingdom, along with Kuwait, Qatar and the United Arab Emirates, wanted to increase production by 1.5 million barrels a day. OPEC accounts for 40 percent of global supply.

More on the Saudi's slash of oil output

Soon after we posted the piece on April 18 regarding the report from the Saudi Oil Minister, Ali al-Naimi, we discovered an article we'd clipped from the Oil & Gas Journal, sourced from the Oil & Gas Journal Online, dated March 28 (two days before the President's energy speech).  So, this March 28 article actually contained the news of the "output cut", which Mr. Naimi re-delivered on April 18.  The article quotes Barclays Capital managing director Paul Horsnell, and he paints a far different picture of the worldwide supply, demand and capacity issues than did Mr. Naimi:

"Saudi Arabia's production is estimated at 8.2 million b/d. [which is what Mr. Naimi said they had indeed produced in March, some four weeks later]  However, Horsnell said, recent data are pointing to Saudi output close to 9 million b/d in December and "and at that level in January and February." [Mr. Naimi confirmed the 9 million b/d, as to February]

"He said, "This has two main implications. First, it is the source of another downward revision of start-of-year spare capacity levels, since Saudi Arabia's output has been higher than was originally reported.  The second implication is in what it suggests to us about how much Saudi Arabia needs to produce to balance the market."

In other words, Mr. Horsnell is saying that since the world previously thought that the Saudi's were producing less in December than they actually were, then the estimated worldwide "buffer" production capacity was significantly less than believed, as well.  Also, his observation that the Saudi's evidently needed to produce at 9 million b/d in order to balance the market is the exact opposite of what Mr. Naimi said, four weeks later.

Mr. Horsnell went on to say:

"Even producing 9 million b/d, Saudi Arabia still has left "a significant deficit at the margin of the market with inventories falling faster than normal, even before Libyan exports came off the market.  Allowing for a normal second quarter global inventory build and replacing lost volumes from elsewhere seems likely to require Saudi Arabia to move up to 10 million b/d, in connection with higher volumes from the other holders of spare capacity ..."

This doesn't sound much like a market which is oversupplied ...

Earlier in the same article, with respect to demand, Mr. Horsnell said:

"Oil demand growth in 2010 earlier was estimated at 2.57 million b/d, with 2011 growth previously forecast at  1.56 million b/d.  Now 2010 demand growth is put at 2.83 million b/d-making it "the strongest year for global oil demand growth over the past 30 years."

This doesn't seem to jive with the drop in demand/oversupplied market to which Mr. Naimi referred ...

Tom Whipple, a former government analyst and current Peak Oil news aggregator came out soon after the Naimi announcement, outlining the oversupply scenario.  However, on April 25, Mr. Whipple supplied some alternate explanations for the Saudi cutback.  One of his explanation's revolved around the fact that Saudi oil production has finally reached the practical limits to its growth, and that the Saudi's could not sustain the 9+ million b/d rate comfortably.   Stuart Staniford, a PhD physicist and analyst of Saudi production, provided some interesting graphs on April 13.  Looking at one of those graphs in particular, what stands out is the substantial rate variation in the 2003-2011 period.  Of course, Saudi is the ultimate swing producer.  But with the exception of a period in 2005, it appears that rates never stay above 9 million b/d for very long; that is, even in face of high prices and a tight market the rates come down substantially, after a brief peak.  One might worry that the "maximum reservoir contact" (MRC) wells in Ghawar and elsewhere are tending to cone water after a short run at high rates, and that some wells might be threatening to water out if these high rates are sustained.  If this is the case, this would mean that the often touted "worldwide spare capacity" of 3 million b/d or so ... is just not there (as it derives primarily from the Saudi's).  In turn, if the Saudi's can't really sustain even 9 million b/d, then this would have serious implications for the world in that the next, more intense manifestations of Peak Oil may be nearer than we think.

(Mr. Whipple also offered an alternate explanation in terms of "the Saudi's making a political statement" in their cutting of production.  This theory would suggest that the Saudi's were upset with the flip-flops in US support for some of the other Arab regimes, and cut production as a result.  This might be, but in light of the prior, substantial fluctuations shown by Staniford, it seems that some production capacity-related explanation is a better fit.)

"Saudi's slash oil output" ... or did physics?

"The market is 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. The reason I gave you these numbers is to show you that the market is oversupplied," Naimi told reporters.
Saudi oil minister Ali al-Naimi, April 18, 2011

Does that statement make any sense?  Saudi production goes down in the face of rising demand, and prices skyrocket, and that shows the market is oversupplied???  Wouldn't prices have dropped drastically during that period if the market had been oversupplied?

Once again, it seems that Saudi oil production went from 9.125 MMBO/D in February, to 8.292 MMBO/D in March.  And remember (as we used to always tell the boss) February is always a "bad month" because it has fewer days.  Meanwhile, oil prices increased substantially in March.

You've got to ask yourself, why would Saudi oil minister al-Naimi issue this seemingly nonsensical press release?

Realize that the Saudis are our "partners" in trying to keep the world economy out of the ditch - they know it is not in their best interests to wreck the world economy, else demand for their product (oil) will go down.  So, they are not interested in $200 oil, or even $150 oil.  As the King said years ago, "You need the oil, we have the oil."  In exchange, we no doubt have security arrangements with them, and sell them billions in defense hardware.  (According to the WSJ today, Saudi Arabia had $41.3 billion in defense spending in 2009, compared to Iran's $8.6 billion in that year.)

So, back to the question.  If the "jig were up" - that is, if the onset of production rate decline was imminent, or even past tense - for the country generally believed to have the world's largest reserve capacity in terms of production rate, as well as the largest remaining reserves, then there might be one more ploy, one that might hold up for a few months (or not).  That would be to suggest that you were voluntarily cutting back production rate, rather than it happening despite your best efforts to increase it.  Or, put another way, that you were cutting the rate on purpose, rather than it dropping due to the inevitable decline in the production rate of a limited resource, aka Peak Oil.

One other thing:  Why would President Obama, in his "energy policy speech" of March 30, 2011, suddenly say we need to do more drilling for oil in the US, embrace shale gas and natural gas vehicles?  Previously President Obama only had room for renewables in his public speeches.  Continued oil and gas development, utilization of natural gas for transportation, conservation (of primary importance), renewables and sensible clean coal and nuclear make up the bulk of the often touted "all-of-the-above solution".  Often touted ... but not by President Obama!  Why the sudden shift in "policy"?  We already knew the answer, but hearing it from the President sent a chill up our spine, nonetheless.  It might be as close to a Presidential Peak Oil admission as we ever get - and likely as close as we really want.  It's time to stop petitioning, stop talking about why this or that won't work, and start focusing on what you can do, what your role is in the "all-of-the-above" solution.

Full press release here:   Saudi's slash output