Much Sound and Fury Signifying Nothing | Russell T. Rudy Energy LLC
Initially, the agreement between Russia, Saudi Arabia, Qatar and Venezuela to freeze production at January levels sparked optimism. Oil market observers thought this might lead to price stability, and ultimately, to recovery. However, optimism did not last long and there is an emerging consensus that the agreement was much like Hamlet’s reflection on life.
A recent article in “World Oil” is an example of the skepticism about the real impact of the production freeze. Saudi Arabia is already pumping oil at near record levels. Theoretically, a freeze would mean that the desert kingdom would forgo its traditional summer increase in production to meet domestic power generation demand as subjects turn up their air conditioners. This would supposedly reduce Saudi exports by about 500,000 barrels of oil per day (bopd).
However, Amrita Sen with Energy Aspects Ltd., points out that a dip in Saudi exports would not leave the market short. In fact, January production was at 10.2 million bopd which exceeds the summer peak in all but one of the last 10 years. According to the International Energy Agency (IEA), the second quarter global surplus will still be about 1.5 million bopd.
Sen observes, “The kingdom will not necessarily have to sacrifice crude exports to meet seasonal demand.” With large stored inventories of oil, and natural gas from the new Wasit project, domestic power generation needs could be easily met. She predicts, “If alternatives can fill the gap in the summer, the dip in Saudi summer exports will not be that significant.”
The impact of the other parties to the agreement freezing output will be, at most, limited. According to the IEA, they were all expected to have flat production this summer anyway.
Harry Tchilinguirian with Paribas sees the freeze as an empty gesture, opining “For Saudi Arabia to announce an output freeze is disingenuous when their production levels are already at the high water mark.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/2/24/what-a-saudi-oil-supply-freeze-would-really-mean-for-markets .
