ARABIAN OIL PRODUCTION INCREASE HAS LITTLE EFFECT ON WORLD PRICES

SAUDI ARABIA RAISES PRODUCTION WITH LITTLE VARIANCE IN PRICE EFFECT

Saudi Arabia is by far the world’s largest oil exporter. Thus, when it raises its production, oil prices usually fall. Yet, when Ali Naimi, Saudi oil minister, said last week Riyadh was pumping more than 10m barrels a day, prices barely moved a few cents.

Oil traders were in disbelief at the number. The International Energy Agency estimated that in October the kingdom pumped 9.45m barrels a day and Opec itself put Saudi production at 9.47 b/d in the same month. The level of production that Mr Naimi stated suggested a huge increase, in only a few weeks. Moreover, the 10m b/d is a psychological barrier – a level the kingdom has not reached since the aftermath of the second oil crisis in 1979.

The level of Saudi oil production has triggered a heated debate among oil traders, analysts and government officials.

The discussion is twofold: on the one hand, about the level itself; on the other, about why it has boosted its output at a time when many are betting that oil demand growth is slowing down, not accelerating.

The discussion is critical to understand the direction of oil prices in 2012.

The 10m b/d figure is controversial in the market.

Some oil traders do not believe the number at all. Two of the largest top-five independent oil trading houses have told me that their own numbers suggest a much lower production level. The traders largely dismiss the 10m b/d figure as a bargaining tactic ahead of the Opec meeting on Wednesday.

Yet, other sources suggest that Saudi Arabia has indeed boosted production sharply over the past few weeks, potentially towards the 10m b/d mark.

The Lloyd’s List Intelligence Apex database, which tracks tankers around the world, puts Saudi Arabia’s oil exports at nearly 7.4m b/d. Add local demand of about 2.7m b/d and you get to the 10m b/d. In addition, Lloyd’s List Intelligence estimates suggest that Riyadh boosted month-on-month exports sharply, from 6.7m b/d in October to 7.4m b/d in November. Other tanker trackers have yet to publish their numbers, but the talk in the market is that they also have witnessed a big increase in tankers sailing from Saudi oil export terminals.

So if the numbers are right – a big if for many traders – what do they say about the health of the global oil market?

The International Energy Agency puts global oil demand this quarter at 91.4m b/d, up from 90.9m b/d from the previous quarter due to the onset of the Northern hemisphere winter and the surge in heating demand. The seasonal increase in demand could well explain an output hike.

But I think there is more. China’s oil demand, which only a month ago appeared to be slowing down to a halt, could be accelerating in reality. Chinese refiners processed a record amount of crude oil in November to offset diesel shortages and oil imports surged last month to the second-highest monthly volume on record, hitting 5.52m b/d, just short of an all-time high of 5.67m b/d in September 2010, according to estimates by Thomson Reuters based on official Chinese data.

The bottom line is that Saudi Arabia could very well be telling a lot of naysayers and sceptics in the market that global crude oil demand is a lot healthier than many assume.

Sourced & published by Henry Sapiecha

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