To ward off a further surge in oil prices Saudi Arabia is pumping almost 10 million barrels of oil per day, pushing the world’s largest oil producer to produce closer to its capacity than at any time since the 1970s.
After Saudi’s crude capacity is tapped out, only the release of the strategic oil reserves held by OECD countries would stand in the way of a severe oil shock.
Other inventories of oil in consumer countries are low, and China still has a significant way to go before its own reserve reaches the percentage of its consumption required by the International Energy Agency, the OECD body that manages the strategic reserve and lobbies on behalf of consuming countries.
These concerns, amplified by the ongoing diplomatic spat between Iran and Western nation over the purported weaponisation of its uranium enrichment program, have kept Brent futures at $122 a barrel at the time of writing.
The IEA recently cut its estimate of Saudi’s production capacity to 11.9 million bpd, and said Saudi pumped 9.9 million bpd in January.
Saudi maintains that it can pump 12.5 million bpd if needed, though it would take up to 90 days to reach full capacity. Oil Minister Ali Al Naimi claims the Kingdom can pump between 11.4 and 11.8 million bpd at the spin of a tap.
Other gulf producers are already producing at or very near capacity, with the UAE and Kuwait both pumping around 3 million bpd in January.
The Kingdom’s importance has already increased dramatically following increasingly stringent sanctions on Iranian oil, with consumers from Asian and European countries queuing up to court secure supplies.
With no end date in sight for EU and US sanctions on Iran’s crude exports , and signs that countries not bound by existing sanctions are nonetheless aligning with countries which have banned Iranian crude, the issue of Saudi’s burgeoning domestic demand becomes more pressing.
In response, Saudi is opening old reservoirs such as the Dammam field and turning to unconventional resources recovery to try to wean itself of burning crude for power generation and onto gas.
A gloomy demand outlook in many advanced economies may also help providing some room. The IEA has repeatedly slashed its demand forecast for 2012 and 2013, with their latest outlook putting growth at only 89,000 bpd – or 0.9% – this year, led entirely by Asian demand.
