August 18, 2022

Saudi Arabia, Defying OPEC, Will Raise Its Oil Output

The Saudi newspaper Al-Hayat reported on Friday that oil officials there had decided to increase production to 10 million barrels a day in July, from 9.3 million barrels, with most of the additional output going to China and other growing Asian economies.

Saudi oil officials did not comment on the report, but the fact that they did not deny an article that appeared in the tightly controlled Saudi press was taken by analysts as confirmation.

The price of a barrel of light sweet crude dropped by nearly $2.64 to $99.29 a barrel in Friday trading, returning to the level that existed before the OPEC meeting in Vienna this week that ended in disarray, with delegates refusing to raise official production levels.

The Saudi move, which was not unexpected, shows that Saudi Arabia will try to counteract any shortages in the market arising from the turmoil sweeping through North Africa and Middle East.

The fighting in Libya has taken 1.3 million barrels off the world market, and the turmoil in Yemen and Syria has subtracted an additional 300,000 barrels.

“The Saudis are showing they can take unilateral action,” said Andrew Lipow, a former Amoco trader who is president of his own consulting firm. “It will show the markets that the Saudis are serious about tempering further increases in price.”

Saudi Arabia is by far the largest producer and exporter in the Organization of the Petroleum Exporting Countries, and is the only member that has considerable spare production capacity. That normally gives the country predominant power in OPEC.

But this year, tensions are running high between Saudi Arabia and Iran as they compete to influence political tides convulsing the region, particularly in Bahrain, where more than 1,000 Saudi troops are bolstering a Sunni monarchy against mostly Shiite protesters supported at least verbally by Iran.

Iran, which holds the revolving OPEC presidency this year, blocked Saudi efforts at the group’s meeting in Vienna to raise official production quotas. Since many countries including Iran already are exceeding the quotas, the failure to increase them was seen as largely a symbolic slap at Saudi Arabia.

Middle East and oil analysts viewed the Saudi decision Friday as a counterpunch directed at Iran, one that would ultimately show that Saudi Arabia remained the most powerful OPEC member whether it acted inside or outside the cartel.

“Saudi Arabia is meeting an Iranian challenge,” according to an article published online by the Dubai-based, Saudi-owned Al Arabiya news organization. “The kingdom signaled its intention to confront Iran and meet potential shortages in supply.”

But there is only so much Saudi Arabia can do to satisfy a tightening world market. The country has an estimated spare production capacity of 2.5 million to 3 million barrels a day, a thin cushion especially if violence spreads in the Middle East and with oil consumption growing through much of the developing world.

China alone imported 876,000 more barrels a day this May than in the same month last year, according to Barclays Capital.

In its monthly report, OPEC estimated on Friday that global demand would rise by 2.5 million barrels a day in the second half of the year. With demand growing and production rising by a mere 200,000 barrels a day among non-OPEC producers, the report predicted there would be “much higher demand for OPEC crude, reaching a level higher than current OPEC production and implying a draw in inventories.”

OPEC members are currently producing 28.8 million barrels a day, about 1 million barrels a day below what world markets will require in the second half of the year, according to Jeff Dietert, an oil analyst at Simmons Company International, an investment bank.

“This incremental supply will help keep oil prices from rising more sharply,” Mr. Dietert said of the Saudi move, but he added that prices would probably still go up.

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