By Nick Cunningham, Oilprice.com:
President Trump said in a tweet on Saturday that Saudi Arabia agreed to boost oil production by 2 million barrels per day (mb/d), a claim that surely came as news to the Saudis.
Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to high! He has agreed!
— Donald J. Trump (@realDonaldTrump) June 30, 2018
The tightening of the oil market has pushed up prices, which is always a concern for U.S. politicians wary of catching heat from their constituents.
The decision by OPEC+ in June to hike production by 1 mb/d looks increasingly inadequate in dealing with the growing number of supply outages around the world. It’s no surprise that Trump wants more Saudi oil on the market, but he likely misunderstood what the Saudis told him.
Saudi Arabia was producing 10 mb/d in May and recent reports suggest they might add as much as 800,000 bpd to 1 mb/d in July, a massive increase in such a short period of time.
But it’s a far cry from the 2 mb/d that Trump thinks Saudi Arabia will add. That would translate into overall production of around 12 mb/d, which is probably unrealistic for a few reasons.
First, there are technical questions about how far and how fast Saudi Arabia can push its oil fields. Can they ramp up to 12 mb/d? Probably, but there is not a lot of historical evidence to go on. Also, they probably can’t do it immediately, it would take time, perhaps more than a year.
The second – and more important – reason why Saudi Arabia won’t comply with Trump’s wishes to add another 2 mb/d onto the market is that they don’t want to. Ramping up that much would leave the oil market dangerously low on spare capacity, cutting it down to less than 1 mb/d. At that point, any supply disruption would send oil prices skyrocketing. Indeed, it wouldn’t even take a tangible disruption – the mere possibility of another outage would lead to a significant volatility.
Of course, Saudi Arabia is aware of this, which is why it is extremely hard to imagine them adding 2 mb/d. Perhaps that is why the White House walked back President Trump’s comments when they published details of Trump’s conversation with King Salman. “In response to the President’s assessment of a deficit in the oil market, King Salman affirmed that the Kingdom maintains a two million barrel per day spare capacity, which it will prudently use if and when necessary to ensure market balance and stability,” the statement from the White House read.
Increasing supply by 2 mb/d is a very different thing than “prudently” using spare capacity to “ensure market stability.”
Nevertheless, Trump is probably right that the oil market needs more supply. And OPEC could struggle to meet the emerging supply gap, which seems to grow worse with each passing day. Venezuela has lost close to 1 mb/d in the past two years, and could lose another 500,000 bpd over the next year. An outage in Canada is expected to send a little over 350,000 bpd offline for the month of July. And Trump himself could be responsible for disrupting around 1 mb/d – or more – of Iranian supply.
“Don’t forget the one negative to the Iran deal is that you lose a lot of oil, and they got to make up for it. And who is their big enemy? Iran. OK. You think of it. Iran is their big enemy, so they are going to have to do it,” Trump said on Sunday in a Fox News interview. “And I have a very good relationship with the (Saudi) king and with the crown prince of Saudi Arabia and with the others around and they are going to have to put out more oil.”
Over the weekend, the oil market received another jolt on news that force majeure will likely be declared at two additional Libyan export terminals, which has translated into the disruption of more than 850,000 bpd and has pushed the country’s output down to a paltry 300,000 bpd. It’s a staggering loss, and it almost single-handedly wipes out the planned increase from the OPEC+ coalition.
Oddly, oil prices did not spike at the start of trading on Monday, which suggests oil traders clearly didn’t entirely dismiss President Trump’s bold claim that OPEC would add 2 mb/d. The market is probably betting that Saudi Arabia could add more supply than previously indicated.
But as the supply outages mount, Saudi Arabia is in danger of losing control of the market. Riyadh does not want to burn through all of its spare capacity, which means it won’t add something like 2 mb/d. However, that means that the market is starting to look undersupplied for the second half of 2018. It’s a tricky balance for Riyadh, wanting to keep the market balanced but also wanting to keep dry powder for future disruptions.
Most likely, the Saudis will opt for allowing prices to go higher rather than using up most of their spare capacity. By Nick Cunningham, Oilprice.com