Will Saudi Arabia answer the call?

Will Saudi Arabia answer the call?

Will Saudi Arabia answer the call? OPEC ministers will meet this week. Analysts are wondering whether the oil-producing nations will be able to maintain global production as geo-political tensions continue to affect production.

It was not long ago that oil analysts were talking about a global oil market that was going to be oversupplied. According to the optimists global demand for oil has topped out. New hydro-fracking technologies are allowing vast new reserves to be tapped. New flow expected to come online in Iraq, Iran and Libya was expected to put downward pressure on prices.

But as the latest OPEC ministers gather ahead of the meeting the 2008-era worries about the future of global flow are re-emerging.  
In Iraq a spate of violence has undermined expectations for future production. A couple years ago optimists talked about production rising to 6 million barrels a day. Recently, Iraq had hoped to increase production 30 percent in 2014 to 4 million barrels a day. But this has not been the case. A vast region of the country has been taken over by militants. Bombings have increased in Baghdad. The real story is that production has actually contracted 8 percent since a peak in production of 3.6 million barrels in February.  This production rate represented a 35-year record high for Iraq.

In Libya output has fallen to a 10th of capacity, a result of protests at oil fields and strikes at export terminals. The country’s potential production is 1.6 million barrels, but actual production is a fraction of that in a country that has splintered among warring militias. Iran secured six months of relief from sanctions imposed by western governments. The country was supposed to pump more oil than it has in the last five years as a result. But production has not increased as fast as many thought.In North America the American shale production “revolution” is already beginning to fray. The flow of oil from Fracked shale wells are declining rapidly, sometimes by as much 80% over the first year of production. The rapid decline rates of fracked shale wells suggests the impermeable, unporous nature of the rock being drilled will limit future production. A recent report suggests the Monterey shale in California, expected to be a major producer, will give up 96% less oil than once thought.

All in, the idea that OPEC production would rise so high that Saudi Arabia would have to cut back its production is no longer the story. Now, the take is that Saudi Arabia may need to pump a record 11 million barrels a day by December to cover the other lack of production in member nations as a way of maintaining a stable global oil market. The kingdom claims it can increase production to over 12 million barrels a day at will. Many question whether this is possible. The country pumped 9.67 million in May. Pumping 10.5 million barrels would be a record for the country. At the same time the country’s largest fields are aging. Production is only being maintained at the levels now occurring as a result of massive injections of sea water into the reservoirs. Some suggest the country is already at peak production. Whether the Saud’s can increase production in the months ahead will determine the direction of oil prices.  

“Now it’s not whether the Saudis will make room, but whether they’ll keep it going and maintain enough spare capacity,” said Jamie Webster, an analyst with IHS Inc. “OPEC is increasingly having a hard time just doing its job of bringing all the barrels needed.”