Profiteering off regional tensions? Saudi Arabia to pump more oil in 2014
Data released by OPEC Monday showed its daily basket price stood at $103.11 per barrel Friday, up from $102.23 the previous day.
“While we still expect global oil market balances to be in surplus for 2014, regional and global geopolitical developments are the key pressure points keeping prices at elevated levels,” economists at Jadwa Investment said in a report released over the weekend. “The ongoing tensions in Libya, limited growth in output from Iran and Iraq and geopolitical tension in Ukraine have added a risk premium to prices,” they added.
For instance, the armed conflict in Iraq, where Kurdish militia – with support of targeted US air strikes - are fighting to stem the advance of Islamic militants in the country’s northern region, has added “significant downside risk” to the country’s oil outlook, Jadwa said.
To counter supply outages in Iraq and among other OPEC producers, Saudi Arabia has maintained a high level of oil output, with data from the Joint Oil Data Initiative putting Saudi production in May at 9.7 million barrels per day, up from 9.6 million in April. “A number of factors have contributed to this growth, including continued outages and slower growth in output from other OPEC members, faster than expected upturn in the US economy resulting in higher demand for Saudi crude and higher year-on-year domestic Saudi consumption,” the Jadwa report said. As a result, the economists revised up their projection for Saudi oil supply in 2014 to 9.7 million bpd from their previous estimate of 9.4 million bpd.
However, “while supply from the Kingdom has been sufficient to meet internal and external demand for its oil, it has been unable to reduce the risk premium currently attached to oil prices,” they said.
The report added: “Indeed, the more the Kingdom produces, the lower its spare production capacity becomes, meaning the smaller the cushion to cope with new supply disruptions. Concerns about available spare production capacity may weigh on market sentiment.”
As for prices, after averaging $110 per barrel so far in 2014, the Jadwa economists raised their outlook for benchmark Brent crude - “to reflect the current high price levels” - and now expect it to average $109 this year.
“We still anticipate that oil prices will fall towards the end of the year as demand gradually falls from peak summer season during the third quarter,” the report continued. “However, we continue to see an additional floor on prices on the back of higher costs of production related to US shale oil, which is increasingly contributing to a larger share of global oil output.”
It estimates this floor on oil prices is above what Saudi Arabia needs to balance its budget at $85 per barrel.
In addition, the Jadwa economists said any heightening of tensions in the region would only serve to push both oil prices and Saudi production higher, “thereby supporting both sovereign and external positions of the Kingdom.”