Saudi Arabia: The Savior of the World

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In the month of June, Saudi Arabia increased crude oil production by 700,000 barrels per day. The monthly oil report released on Wednesday showed Saudi Arabias response to OPECs failure to reach agreement on raising output quotas during a meeting on June 8.

This has placed the International Energy Agency at an awkward position. The IEA is planning to wait and watch the oil market until next week to decide whether to repeat its decision to draw on strategic reserves.

Saudi output

It is estimated that Saudi output increased to 9.7m barrels per day (b/d) in June the highest level since February 2006. The IEA suggested the kingdoms production has continued to climb this month, possibly reaching 10m b/d.

David Fyfe, head of the IEAs oil industry and markets division, described this as a very welcome sign. But the report cautioned that total Opec output of 30m b/d still remained well short of the anticipated call on the cartels crude of 31.3m b/d in the third quarter of this year.

Mr Fyfe noted: Were still seeing a sharp rise in the call for the third quarter overall. The IEA decided to draw on strategic reserves for a 30-day period starting on June 23. A decision on whether to repeat the exercise must be taken by July 23.

Mr Fyfe said: Were really going to be assessing the situation very carefully in the early part of next week. It was too early to say whether it might be necessary for the IEA to draw on stocks again.

Oil prices have climbed back to levels seen before the IEA drew upon its reserves, with a barrel of Brent crude trading up $1.45 a barrel at $119.20 on Wednesday.

We acknowledge that the impact of the collective action will only be truly evident in hindsight. However, recognising the flexibility and market liquidity it has already provided, we take a resolutely positive view so far, said the IEA.

Demand

Many of the extra barrels will have been supplied to its own refineries, where throughput is believed to have risen by 250,000 b/d to 1.71m b/d, largely because of the return to full service of the Rabigh facility after routine maintenance.

The kingdom needed more oil for power generation and water desalination plants during the peak summer season. About half of the extra output 350,000 b/d is believed to have entered the international market.

Analysts said that Saudi Arabia has been quietly increasing its crude oil production as Riyadh is trying to bring oil prices down to more comfortable levels for consumers in the US, Europe and China.

Well to some this may seem kind of a contradiction, but it all relates to demand. More precisely demand destruction. Sell anything for too much, and buyers begrudgingly pay now but up their efforts to find the product cheaper elsewhere, or worse, swear off the product altogether.

Saudi Arabia sits atop 25% of the worlds proven oil reserves, and has invested hundreds of billions over many decades to make that oil accessible to the West and East with repeated increases in production capacity.

Given that the petroleum sector accounts for roughly half of government revenues, ensuring an oil price that isnt prohibitively expensive for consumers is a primary concern, for fear that an oil price too high would bring a windfall in the short term, but demand destruction in the medium to long term.

Overall Saudi not only seems to have its interest at heart but also the interest of the world.

Source: Financial Time, Tradingrg

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