No cuts: OPEC’s largest producer keeps on pumping oil

Production from Saudi Arabia’s oilfields will remain at near-record levels in the short to medium term, with Riyadh looking to maintain above-average output despite low prices. At its June 2015 meeting, OPEC decided to keep the bloc’s production at 30m barrels per day (bpd), the level that had been agreed the previous November. According to the International Energy Agency (IEA), combined output from the 12 member states for May 2015 was 31.3m bpd, with Saudi Arabia remaining by far the largest single contributor to production.

Saudi Arabia pumped a record 10.3m bpd in May and flagged the possibility in June of raising output even further. Ahmed Al Subaey, executive director for marketing at Saudi Aramco, said that any increase in global demand could trigger a further rise in production. “We have plenty of crude,” he told Reuters. “You are not going to see any cuts from Saudi Arabia.” The Kingdom has a production capacity of around 12.5m bpd, which means it has a comfortable margin should it need to raise output.

Global Repercussions

OPEC’s decision to keep production levels high, taken together with Saudi Arabia’s suggestion that it could raise output even further, is seen by some analysts as putting additional pressure on North American oil production and exploration. In mid-June 2015, the Canadian Association of Petroleum Producers forecast that shale and conventional light oil production in western Canada would be scaled back to 730,000 bpd by 2019, down from the 770,000 bpd projected for 2015, a result of OPEC’s lower pricing and higher output policy, the association said. Production in the US shale industry is likely to face a similar squeeze.

However, Saudi Arabia’s decision to step up production is also partly a response to rising domestic demand, especially during peak periods. Estimates from sector consultancy Energy Aspects, based in Vienna, and Boston-based ESAI Energy project a 20% increase in domestic Saudi oil consumption for the summer of 2015, with the Kingdom’s power stations set to burn 420,000-430,000 bpd, up from 300, 000-410,000 bpd in the summer of 2014.

Saudi Aramco Products Trading Company − an arm of Saudi Aramco that provides trading services for petroleum products − reached out to external markets in early June 2015 due to the expected seasonal surge in electricity demand. Tapping suppliers in both India and the Middle East, the company bought 1.1m barrels of gasoil for delivery in July, just ahead of the peak consumption period. Due to soaring temperatures during its summer period, Saudi Arabia has been a top importer of gasoil during the midyear months, but imports are set to fall as it adds capacity from new refineries.

Oil Price Drop

While the IEA has forecast an increase in global oil demand for the second half of 2015, the rise is expected to be more muted than in the first half of the year. This slower demand growth, the agency said, would be due to the “temporary nature” of many of the factors that contributed to expansion in the first two quarters.

Global demand could also be hit by headwinds from Europe, with concerns over the long-term sustainability of Greece’s sovereign debt and a new escalation of the conflict in Ukraine potentially dampening prospects for economic recovery. Furthermore, ongoing instability in parts of the Middle East, in particular Iraq, could affect pricing as well.

The fall in global oil prices means that the energy sector’s contribution to Saudi Arabia’s economic growth in 2015 will be limited. A recent report by National Commercial Bank forecast that the Kingdom’s GDP will expand by 3.4% in 2015, roughly in line with the 2014 rate of 3.6%. As was the case the previous year, growth in 2015 will be driven by the non-oil sector, which the bank said would increase by about 5%. Growth from the oil sector can thus be expected to be modest in 2015 after a rise of 1.72% in 2014, even with any increase in production.