Saudi spare oil capacity ‘dwindling’

Saudi Arabia’s cushion of spare oil capacity is thinning far faster than widely believed, threatening to trigger price spikes in the months ahead, energy industry experts warned today.

Concerns are growing over the kingdom’s ability to pump more oil beyond an anticipated summer boost, leaving the world exposed to any further unexpected disruptions.

The world’s top exporter promised to produce as much oil as the market needs after Opec last week failed to reach a deal.

Saudi newspaper al-Hayat reported Saudi Arabia would boost output to 10 million barrels per day in July, which Goldman Sachs’ global head of commodities research Jeff Currie said would leave only 500,000 bpd spare, Reuters reported.

Currie and his team have warned for months about overstated Saudi output capacity.

“If you get up to (10 mln bpd), you start to really create a very tight market relative to spare capacity,” he told the Reuters Global Energy and Climate Summit in London.

“But the question that’s more appropriate is when do you get to 9.5, when do you get to 10? Because when you start to look out over the horizon, their ability to create more flexibility in spare capacity increases tremendously.”

Peter Oosterveer, group president for energy and chemicals with global engineering giant Fluor, recently met with executives in the Middle East, and returned with a feeling that Saudi Arabia’s capacity was not as large as some estimates.

He did not provide any specific numbers on the kingdom’s overall production, but said workable spare capacity was in the range of 1.5 to 2 million bpd.

“That doesn’t mean to say that it isn’t ultimately available,” Oosterveer said at the Summit. He added that there did not seem to be a great deal of concern in Saudi Arabia about the current level of capacity.

“There’s always a lot of activity in Saudi, and there’s still a lot of activity in Saudi as we speak,” he added, with more focus there on exploration and production projects compared with two or three years ago.

Following a wave of investment as oil surged to a record high $147 per barrel in 2008, Saudi Arabia says its capacity stands at 12.5 million bpd, giving it a comfortable cushion based on recent output estimates.

But analysts are still beginning to debate the risk of a repeat of the last decade, when years of underinvestment and a surge in Chinese demand forced Opec to pump nearly flat out, drawing down their reserve to less than 1 million bpd.

That fundamental tightness underpinned the five-year rally that lifted prices six-fold until 2008. While few expect that to recur as spectacularly, some are warning of spikes.

“Once spare capacity falls below 2 million bpd, which will be sometime next year, then we will see substantial spikes in the oil price from time to time,” Robeco fund manager Peter Csoregh told the Summit.

“There’s an inherent bias, especially in the Middle East and Saudi Arabia, to overstate their spare capacity.”

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