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Doubts on Saudi Capacity May Keep Oil Volatile

Wall St Journal, 24 September 2012

Oil prices are likely to remain volatile over the next year, analysts say,
amid worries that Saudi Arabia has become less able to pump the global market
out of any extraordinary disruptions to supply. Saudi Arabia and some smaller Gulf oil producers have stepped in to cover
recent shortfalls, but analysts are increasingly skeptical about whether these
countries have the capacity to shield Western consumers against a new oil shock.

"The cushion to cope with supply shortfalls looks uncomfortably thin,
especially in light of heightened geopolitical risks in the Middle East and
Africa," Deutsche Bank said in a report Friday.

By the middle of this month, the Brent crude contract—the most widely used
globally—rose close to $117 a barrel, up 28% from late June, after renewed
tensions over Iran's nuclear program and the killing of the U.S. ambassador in
Libya.

That week, Israel's prime minister, Benjamin Netanyahu, blasted the U.S. for
not doing more to curb Iran's nuclear program, sparking renewed fear in oil
markets that it might unilaterally bomb the Islamic Republic to destroy its
atomic facilities. Since the beginning if the year, Iran has stepped up threats
of responding to an attack by shutting the Persian Gulf's Strait of Hormuz,
through which nearly 20% of all oil shipments are transported.

On top of Iran's nuclear program, the civil war in Syria could also
destabilize the region.

This all comes amid the backdrop of a halving in Iranian oil exports, now
worth some one million barrels a day, following European and U.S. sanctions
against Iran.

Yet markets have also reacted positively to Saudi pledges of increasing
output, helping push Brent prices back down last week. On Monday, Brent crude
declined $1.61 a barrel, or 1.4%, to $109.81.

Saudi Arabia's dominant position means it is one of the few producers able to
significantly boost its output at short notice. The country pumped higher
volumes during the Libyan crisis in 2011 and again this year to offset lost
Iranian exports, increasing volumes to levels not seen in at least three
decades.

Saudi Arabia's oil minister, Ali al-Naimi, has repeatedly dismissed fears
that its spare capacity wouldn't be enough to cover a major disruption.

But experts are skeptical about whether the so-called swing producer would
have enough leeway to make up for a major disruption.

According to the International Energy Agency, Saudi spare capacity—the
sustainable cushion of available oil it could pump at short notice if needed—was
just under two million barrels a day last month, 12% thinner than for the same
period last year, when Libya's output was virtually shut down.

In addition, Saudi Arabia uses more and more of its own oil. In July, the
month when the European Union began enforcing a full embargo on Iranian oil, the
kingdom actually cut exports of oil and condensates by 7% on a monthly basis,
according to the Joint Organization Data Initiative, an oil-transparency effort
that uses numbers supplied directly by governments.

Part of the drop was due to record amounts of oil used by Saudi Arabia this
summer, as economic growth spurs domestic consumption.

"The Saudi spin about increasing supplies to the market is also not very
credible when the supposed increase is coming after a sharp drop in exports,"
Swiss consultancy Petromatrix said in a research note Friday.

At the same time, there have been renewed fears of disruptions in Libya,
where a civil war shut down most of the country's 1.6 million barrels a day of
crude production last year. The killing of U.S. ambassador Chris Stevens in
Benghazi on Sept. 11 was blamed by the U.S. on al-Qaeda. It was a stark reminder
that even though production has returned to near-normal levels, the situation in
the country is far from stabilized.

Many experts say the security concerns could complicate the return of foreign
workers needed to further boost output.

International oil companies "were all generally starting to shift their
perceptions of security in Libya from one of periodic violence to a view that
Libya was going to face systemic instability," says Geoff Porter, a risk
consultant who works for foreign companies in North Africa. "Ambassador
Stevens's death is going to make this view more deeply entrenched. "

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