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    Saudi Arabia Ups the Ante in Supply War (Update)


The Saudi government has ordered Aramco to ramp up supply to 13mn barrels/day.

by: Joseph Murphy

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Natural Gas & LNG News, Middle East, Premium, Corporate, Exploration & Production, News By Country, Russia, Saudi Arabia, United Arab Emirates

Saudi Arabia Ups the Ante in Supply War (Update)

(Adds comment from UK producers' group, GlobalData)

Saudi Arabia's national oil company Saudi Aramco announced on March 11 it would ramp up oil production to 13mn barrels/day after the Opec+ pact expires at the end of this month.

Talks between Saudi Arabia, Russia and other producers in the Opec+ alliance on agreeing a co-ordinated response to the coronavirus (Covid-19) crisis broke down on March 6, after Moscow said it would no longer participate in output cuts aimed at rebalancing the market.

Saudi Arabia has responded by initiating a supply war against Russia and US shale producers, in a bid to force the former back to the negotiating table and the latter out of business. Saudi output has been capped at around 9.7mn barrels/day over the last few months, but Aramco pledged on March 10 to increase its supply to 12.3mn barrels/day. Russia, which produced 11.29mn barrels/day of oil in February, has said it can increase flows by up to 300,000 barrels/day within weeks, and as much as 500,000 barrels/day at a later stage.

In a statement March 11, Aramco said it had been ordered by the Saudi energy ministry to raise output further to 13mn barrels/day.

The UAE, another member of Opec, has also released an announcement saying it will increase supply to more than 4mn barrels/day in April, from the current 3mn barrels/day. It will also accelerate plans to boost capacity to 5mn barrels/day, a target it had expected to reach in 2030.

Brent was down 3.2% at $36.01 after the Saudi announcement, while US West Texas Intermediate dropped 3.2% to $33.24.

Oslo-based Rystad Energy is doubtful about how much supply the kingdom can return to the market, however.

“We estimate that the actual available crude production capacity Saudi Arabia would be willing and able to bring to the market on a sustainable basis is below 12mn barrels/day, closer to 11.5mn barrels/day," Rystad's head of oil markets, Bjoernar Tonhaugen, said in comments to NGW.

Saudi Arabia's highest monthly crude output to date was achieved in November 2018, when it flowed just above 11mn barrels/day.

"The capacity addition announcement would not affect supply capacity in the short term or even this year, but could lead to higher investments and oil field service contracts if followed-through by Aramco," Tonhaugen said.

In light of the UAE's announcement, Rystad expects other core-Opec members to take similar steps.

"We believe UAE can ramp up production to around 3.3-3.4mn barrels/day from their current output of ~3.0mn barrels/day in the short term, and will likely draw-down storage to supply clients additional barrels if there is enough demand for UAE barrels," Tonhaugen said.

UK sees prolonged downturn

The repercussions have hit producers globally, with the UK upstream industry group preparing for a big downturn in discretionary spending.

Oil & Gas UK sustainability director Mike Tholen said: “We have seen an unprecedented fall in the oil price over as the markets opened this morning [March 9] and the industry is monitoring price dynamics closely. The recent improvements across the sector in terms of efficiency and productivity help, but it is likely that companies will be immensely cautious on their near-term spending plans whilst they consider what is unfolding.

"In that context it will be important to watch how the market responds in the coming days in order to fully understand what the longer-term impact on the industry will be. At a time when the sector is positioning itself to support the move to net zero as well as provide the UK with secure and affordable energy, any longer-term challenges will continue to require joined up action from government, industry and regulators.”

And US shale producers will also suffer if they cannot adjust to the new environment said GlobalData, as it warned March 11 of a protracted period of low prices. "In Russia, taxes on oil producers automatically adjust to price and shield margins, so the effects will mainly be felt by the state, which has a longer time horizon. If Saudi Arabia was hoping to force Russia back to the fold on production cuts it may be left disappointed. Given the evidence of recovery of US shale since the last price crash, it may also gain little from the strategy in the longer term if it persists."