Saudi keeps oil tap on for world growth

Saudi Arabia is showing no sign of changing its policy of high oil output to support global economic growth, despite a fall in crude prices below $90 a barrel for the first time in 18 months. Gulf and Western government sources in contact with Saudi officials said the Opec power can tolerate oil at $90 or below for months, price levels that hurt Iran and Russia as they face off against Riyadh over the conflict in Syria. Saudi Arabia has built up a revenue surplus in the first half of the year and requires a much lower oil price to balance its budget than most of its fellow Opec members and leading non-Opec producer Russia. “If we keep producing at roughly the same rate, we’re not flooding the market,” said a senior oil official from a Gulf producer. “And we want to act responsibly for the sake of the world economy.” Strong supporters of Syrian rebels seeking to oust Syrian President Bashar al-Assad, Saudi leaders have criticised Russia for defending him. With Iran, Russia is Syria’s main ally, providing most of its arms. Both Moscow and Tehran need crude at $115 a barrel to meet budget requirements. “Russia’s economy is vulnerable to a sharp drop in oil prices,” said US oil analyst Phil Verleger. “The Saudis may be able to exploit that vulnerability by keeping production at 10mn bpd.” Industry sources say Saudi Arabia, the only oil producer with significant spare capacity, looks set to trim output over the next two months, but only because demand from refineries in China and the US will dip. “We’re told the Saudis are OK with lower prices, $90 or below, for a few months,” said a Western diplomat. “Even if they have to trim back because of lower demand they don’t give us the impression they’ll be bailing out Opec on price any time soon,” he said. Crude is down from a March peak of $128 partly because the economic outlook has darkened but also because Saudi Arabia, pressed by major consumer countries, opened the taps in March to a 30-year high of 10mn bpd. That has made up for a slump in output from Iran because of sanctions, not only drawing criticism from Tehran but others in the Organisation of the Petroleum Exporting Countries who prefer higher prices including Algeria, Iraq and Venezuela. As the group’s main swing producer, Riyadh is largely responsible for the extra volumes that have taken Opec in excess of its official 30mn bpd output ceiling. Opec ministers at a meeting in mid-June said they would adhere to the collective limit, implying a 1.6mn bpd cut from actual supply for 12 members of 31.5mn. For that to happen Saudi Arabia would need to cut back sharply. The prospects of that look slim. Delegates who attended the Opec meeting say Saudi Oil Minister Ali al-Naimi quizzed his counterparts in the 12-member alliance about what contribution they would be making to the cut. “He went round one by one and there was silence—no-one was willing to volunteer a cut,” said one delegate. Asked if Saudi Arabia would be cutting back, an Opec delegate gave a one word answer: “No”. Unable to agree individual quota allocations under its collective limit, Opec has no way of policing output. “It’s highly dysfunctional because most of the countries within Opec have not been investing enough, so they have little spare capacity. Saudi Arabia is the central bank of oil, much more than it ever was, and that’s the reality,” said Leo Drollas at the Centre for Global Energy Studies in London. Underscoring its intentions around what Saudi oil minister has called a “type of stimulus” for the world economy, Riyadh increased its exports in June from May by about 150,000 bpd, an industry source with knowledge of Saudi supply said. Assuming steady Saudi domestic demand, that would push its output close to 10mn bpd again in June after a dip in May to 9.8mn. Saudi exports will probably decline in July and August though, an industry source said, because Chinese refinery maintenance will cut its demand by about 350,000 bpd. The closure for repairs of the new wing of the biggest US refinery, at Port Arthur in Texas, removes another 200,000 bpd of demand. Again assuming steady Saudi domestic consumption, that might mean production comes down to about 9.5mn bpd. Saudi has banked an oil revenue surplus in the first half of the year to see it through leaner times. “Gulf countries can put up with prices of under $90 because during the first half of the year prices were over $100 so a lot of profits have already been made over that period,” said a Gulf Opec country official. “So don’t expect the Gulf countries to instantly turn off supply just because the price goes under $90.” To date this year Saudi Arabia has earned a little over $155bn from oil exports, according to Reuters calculations based on an export price for Saudi crude of $114 on average. Riyadh is estimated to need about $75-$80 a barrel to balance its budget this year. Drollas said the CGES calculated that if Opec kept output at current levels of about 31.5mn bpd, oil prices would fall to an average $74 a barrel in the fourth quarter and $59 a barrel in the first quarter of 2013.