A Candid Admission About Saudi Oil Production

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?......

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