Disquieting Saudi Oil Indicators and the Next Oil Shock  

Stuart at Early Warning has a post looking at the implications of various oil production data points coming out of Saudi Arabia - Disquieting Saudi Oil Indicators and the Next Oil Shock.

There are a growing number of indicators of concern in Saudi Arabian oil production:

1) According to the Wall St Journal, production sharply declined in March

Saudi Oil Minister Ali Al-Naimi said Sunday that oil production from the kingdom was 8.292 million barrels per day in March, down about 800,000 barrels a day from 9.125 million barrels per day in February. Most estimates, including the monthly report of OPEC—which relies on external databases—had seen a rising or stable production at about nine million barrels a day in March.

If I treat this like an early JODI report, the overall production graph would look as above. Obviously, it's strange that Saudi Arabia is cutting production at the same time that the world has lost Libyan output.

2) There was a sudden sharp increase in the count of oil rigs in Saudi Arabia in February and March. Further increases are expected:

Two Saudi officials told Reuters on Tuesday that the extra rig activity would maintain rather than increase the kingdom's oil capacity. It completed a multi-year expansion in 2009 meant to boost spare capacity by more than 3 million barrels per day.

"It's not to expand capacity. It's to sustain current capacity on new fields and old fields that have been bottled up," one of the officials said.

After a long period of declining rig count (indicating Saudi Aramco was not concerned about its ability to maintain desired production levels), the flow of events has turned in the opposite direction. Similarly,

3) Saudi Arabia has just restarted work on the Manifa project that was put on hold in the aftermath of the great recession:

Halliburton (HAL) reported March 28 that Saudi Aramco, Saudi Arabia's national oil firm, planned to restart its $11 billion Manifa offshore project, delayed since 2009.

Aramco puts the field's reserves at more than 10 billion barrels. It plans 31 artificial drilling islands and 13 offshore platforms. Halliburton is currently contracted for services on 93 wells.

Notwithstanding the additional 950kbd of crude and condensate from Manifa,

4) There are reports of a new paper by a senior Saudi oil official that oil production will not rise in the next five years:

Saudi Arabia expects its oil production to hold steady at an average 8.7 million b/d to 2015, rising to 10.8 million b/d by 2030 and leaving the kingdom with 1.5 million b/d of spare production capacity, a senior Saudi oil official said in a research paper released Wednesday.

Majed Al Moneef, Saudi Arabia's OPEC governor, said in the paper published on the Arab Energy Club website that Saudi output averaged 8.2 million b/d in 2010.

(I can't find an English version of this paper at present). I note that the previous maximum of Saudi production was 9.5mbd (see graph above), and now Mr al Moneef is saying that they won't even achieve that over the next five years?

All of this evidence points in the direction of Saudi Arabia being unable to raise production much if at all in the near term. Given a global economic recovery, rapidly growing demand in China and other developing nations, and little hope of a quick resolution in Libya, that raises the odds of a major oil shock a lot. Some of us have been warning for several years that as soon as the global economy recovered sufficiently, there would be another oil shock. I started wondering as long ago as December of last year, whether 2011 could be the year?

[Below] shows the latest public data from the main energy information agencies for Iraqi oil production. As you can see, the sharp rise in January has been sustained, and even increased slightly in March. That last data point is based on a single source (OPEC) so far, so it may shift. Still, at any rate, it's not going down much.