The world’s safety cushion to compensate for sudden disruptions of global production is historically low, as Saudi Arabia’s spare crude production capacity stands at only 1.1 mm bbl/d, Rystad Energy concluded in its latest oil markets analysis.
“The oil market is at risk of price spikes despite the focus on oversupply. Current spare capacity is far lower than the 2.1 mm bbl/d of spare capacity the Kingdom held in 2009, when the oil market last demonstrated a significant misbalance in supply and demand”, says Nadia Martin, Senior Analyst at Rystad Energy.
Rystad Energy forecasts that when the oil market rebalances next year, it will be with limited capacity to increase production meaningfully in the event of a sudden disruption, leaving the market vulnerable to price shocks.
Key findings of the Rystad Energy report conclude:
- Saudi Arabia will again be the world’s largest crude oil producer in 2015, tied with Russia, at 9.9 mmbbl/d production. The US will this year be the world’s third largest crude oil producer. Saudi Arabia last held the position of world’s largest crude producer tied with Russia in 2008, when both countries produced 9.3 mmbbl/d. At that time, Saudi Arabia had implemented a strategy of providing maximum assistance to the market in a year when Brent shot up above 145 USD/bbl. Saudi Arabia’s output level dropped by 1 mmbbl/d the year after, down to 8.3 mmbbl/d.
- Saudi Arabia has held the position of holding the largest share of spare capacity in the market. As recently as 2012, Saudi Arabia increased crude exports to ease market tightness as the US embargo against Iran took effect and as EU sanctions were introduced while Libyan exports had collapsed during the Arab Spring. As a result, according to Rystad Energy’s calculations, Saudi Arabia’s spare capacity had fallen to 0.1 mmbbl/d in 2012. The Kingdom was slow to rebuild spare capacity thereafter, increasing levels to 0.4 mmbbl/d in 2013 and 0.8 mmbbl/d in 2014. For a time when there is a “historic glut” in the oil market, Saudi Arabia’s current spare capacity of 1.1 mmbbl/d is low.
- While Russia is producing crude at the same level as Saudi Arabia, Rystad Energy does not believe that Russia has production capacity it can increase in the near-term. This is despite Russia’s developing two of the top-ten largest offshore start-ups in 2015 and 2016, Arkutun-Dagi in Sakhalin 1 and Vladimir Filanovsky, respectively. Russian output levels have been surprising to the upside in recent months as the economy struggles and requires maximum USD denominated crude sales to help fight the country’s recession. This further emboldens Rystad Energy’s view that all capacity is being put online.
- Besides Saudi Arabia, the US is the remaining producer who can meaningfully increase output in the near-term. Rystad Energy forecasts US crude production of 8.2 mmbbl/d for 2015 and 8.35 mmbbl/d for 2016. In the case of a supply crisis, the US response will occur in three steps: first, within weeks, producers will connect already completed wells to increase output by 100 kbbl/d; second, within a month, producers will complete and connect already drilled wells, so called DUCs, to increase output by 0.5 mmbbl/d; third, with a response time of around a year, producers will increase rig count to increase output by 1 mmbbl/d. While the US supply response to a supply shock could be significant, the resulting oil market volatility could be far greater than expected. The US is a non-crude-exporting nation, and hundreds of companies make individual production decisions.
*Excludes Saudi Arabia’s 50% share in Neutral Zone
Nadia Martin, Senior Analyst & co-author of the Global Oil Market Trends Report
Phone: +47 24 00 42 00
Julia Weiss, VP Marketing
Phone: +47 48 29 87 61
About Rystad Energy
Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.
Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), Africa as well as South East Asia.
About the Global Oil Market Trends Report
The Global Oil Market Trends Report (OMTReport) reveals Rystad Energy’s demand forecast against its bottom-up, field-by-field supply forecast. It includes our market view for oil price direction & forward curve development, explaining market fundamentals, global S&D history and outlook, cost of supply curves, and regional variations.