Mar 26 2012
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Naimi Slams ‘Fear Prices’
Naimi Slams ‘Fear Prices’
Unjustified concern over a lack of supply is primarily responsible for driving oil prices to recent economically dangerous heights of $125/B, Saudi Minister of Petroleum and Mineral Resources Ali Naimi told reporters on 20 March. Mr Naimi pledged Saudi Arabia would act, if called on, to fill any supply shortfall, and gave a vehement rebuttal to suggestions Saudi production capacity was less than its claimed 12.5mn b/d. Rafiq Latta reports.
Mr Naimi’s message, delivered to a selected group of journalists invited to Doha, was the first such initiative for a couple of years, reflecting the seriousness with which Riyadh is viewing the current oil market situation. It followed a Saudi cabinet statement, carried by the official SPA news agency, pledging the kingdom would “work individually and in cooperation and coordination with Gulf Cooperation Council countries and other producers and consumers...to bring back oil prices to fair levels.” Prices eased around 2% in the wake of the minister’s comments.
Supply was absolutely not a real concern, stressed Mr Naimi. “The concern is more about the economy of the world, especially the developing nations,” he argued. “When I met with the ministers in Kuwait, every one of them mentioned the economy, the impact of current prices and the fear that we will have a repeat of 2008.” $125/B prices would probably take a toll on demand growth, Mr Naimi conceded. While criticizing the thinking behind current ‘fear prices,’ he declined to comment on what Saudi Arabia thought was a fair price.
“Supply today has, and has been for quite a while, over demand to the tune of over 1mn b/d,” Mr Naimi said, dismissing claims by some consumers that the market is tight (MEES , 12 March). “If you look at OPEC, OPEC made a decision in June of 30mn b/d and how much are they producing now? Over 31mn b/d.” OECD commercial stocks days of forward cover, which went from 57 days to 58 days from January to February, was further proof supply was sufficient, Mr Naimi argued. “I believe that by March I think it may be 60 days. So you can see inventory is being built.”
The fact that Saudi strategic storage facilities in Rotterdam, Sidi Kerir and Okinawa, amounting to some 10mn barrels, were all full was further proof of a lack of demand for extra barrels, he added. Razor thin refining margins and backwardation in the market structure (the premium of prompt barrels over crude further out) may also have been discouraging buying. “Why buy expensive crude and store when the market is in backwardation?”he noted. “Nobody is going to buy crude if he doesn’t need it at these prices.”
The minister dismissed arguments that more supply now was needed specifically to address an expected supply fall in the third and fourth quarter (presumably as Iran sanctions bite). “If there is demand it will be met, so why should inventories go down?” he argued, noting that the prospects for strong demand growth were weak. “The world economy as you well know is anemic today,” he said. “We are ready and willing to put more oil on the market, but you need a buyer. How much more do you want us to do?”
Mr Naimi reiterated Riyadh’s reassurance that it stood ready and able to fill any supply gap, should it emerge. “There hasn’t been an incident, an event, where we in Saudi Arabia, actually OPEC in general, failed the market,” he argued, reeling off a list of historic Saudi supply interventions. “So why is there a concern today that if something were to happen in the market, we would not be putting forward an additional 2-2.5mn b/d? I don’t know why there is any question in that area.”
The supply situation today is different from 2008, Mr Naimi argued. The minister’s point appears a sound one. Rising non-OPEC and OPEC NGL supply since 2008 appears to have outpaced demand growth, according to OPEC figures. These have risen 3.97mn b/d from 54.63mn b/d in 2008 to a projected 58.6mn b/d in 2012, compared to a 3.23mn b/d rise in demand over the period. The IEA outlook is not dissimilar trendwise, also projecting strong non-OPEC and OPEC NGL gains since 2008 and a slight fall on the ‘call on OPEC’ crude since then.
Saudi capacity gains of 1.2mn b/d with the Khurais project and 500,000 b/d with Khursaniyah, in addition to Iraqi production rises, would appear to outweigh capacity slippages in other OPEC countries. Even when strong domestic Gulf demand growth since 2008 is taken into account, supply-demand balances appear to have improved.
A major sustained supply disruption as a result of rising tensions with Iran over Tehran’s nuclear program would give a far less rosy supply picture. But the minister emphatically dismissed this prospect. “If you believe Hormuz will be closed, I will sell you the Empire State building or the Egyptian Pyramids,” he said.
The minister acknowledged that simply boosting output and cutting further into Saudi spare capacity might not alleviate prices, given razor thin levels of spare capacity elsewhere. But he doubted there would be demand for 12.5mn b/d of Saudi crude. Mr Naimi was less than optimistic that a release from strategic IEA inventories, increasingly talked of in consumer political circles, would have much impact on prices. “I am not going to tell Obama what to think and what not to think. That is up to them. What I can tell you is that they have done it before and it didn’t do anything. You saw what happened in the last release? Nothing!”
‘Trust Saudi Aramco’
Customer nominations pointed to Saudi production of around 9.9mn b/d. The kingdom reached its targeted 12.5mn b/d capacity in 2009 and was well able to deliver on it. “I have read a lot of things in the press and I do not know the purpose of it. When we say we have 12.5mn b/d you can test us and we will deliver 12.5mn b/d.” While facilities took some time to de-mothball, this capacity was ‘absolutely’ available immediately. “Remember we have 40, 60 million barrels inventory in Saudi Arabia...so when there’s an immediate demand we can fill it immediately,” the minister said. “Trust Saudi Aramco,” he urged. Saudi export and surface facilities exceeded wellhead capacity, Mr Naimi explained, noting that Ras Tanura alone had shipped 14.5mn barrels on one day.
Middle Eastdomestic demand has surged in recent years, with appetite spiking in summer months for air conditioning use. Last year Saudi domestic demand in September of 2.385mn b/d was over 700,000 b/d higher than in March, according to the IEF’s Joint Oil Data Initiative (JODI). Mr Naimi dismissed fears of diminished availability of crude for exports. “You guys talk about domestic demand as if we are doing nothing. We have spent a lot of money on gas.” He argued. “We have brought on a lot of gas…close to 57% of our energy today is gas and we have many tricks in our pocket in the summer.”
Rather than a surge in crude demand, this summer will see a 500mn cfd surge in gas capacity as new output from the ramping up 1.8mn cfd Karan field hits the market, Mr Naimi said. There would also be output from the offshore Rabib gas field, which should be able to deliver in the order of 500mn cfd plus, Mr Naimi said. Rabib gas is high quality, requiring very little processing.
A lot of work was also being done on energy efficiency, with new building codes and efficiency codes, currently being implemented. “Today there are some air conditioning units that will not be imported into Saudi Arabia,” Mr Naimi said.
© Copyright MEES 2012.
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