More Gulf oil output cuts likely

Saudi Arabia and other Gulf Opec members, which unilaterally boosted oil supplies this year, are likely to trim flows in 2012 to make way for the restart of shipments from Libya and increased exports from Iraq.

Iraq is expected to boost its oil export capacity in 2012, while Libya, whose output fell to almost nothing during the civil war, has shipped its fourth crude oil cargo since resuming production in September.
As well as the prospect of extra supply, forecasters have been lowering estimates for oil demand in 2012 because of a weaker world economy. The combination could weigh on prices, which have fallen to around $108 a barrel from this year’s high of $127 reached in April.
Top world exporter Saudi Arabia has already started to trim its output, lowering production by about 400,000 barrels per day (bpd) to 9.39mn bpd in September, Saudi Oil Minister Ali al-Naimi said on Saturday.
He did say why output declined but it is likely that some of the reduction was accounted for by a fall in domestic consumption from peak summer demand.
Analysts say more cutbacks may be coming. “That’s the first tranche of it. I think it will probably end up being more than that by the first quarter,” said Greg Priddy, director, global oil at Eurasia Group. “That’s really going to depend on how much comes back from Libya and what happens with the macroeconomic picture.”
Priddy had said in a report last Tuesday that extra Iraqi and Libyan supplies and weaker-than-expected growth in demand could entail output cuts of at least 500,000bpd and probably more from Saudi Arabia by the first quarter.
The Gulf members of the Organisation of the Petroleum Exporting Countries boosted supplies unilaterally after Iran, Venezuela and African countries blocked a Saudi-led proposal to increase output targets at Opec’s last meeting, held on June 8.
Supply from all 12 Opec members in September on average reached 30.25mn bpd, the highest level since October 2008, a Reuters survey found. That is enough, in the view of some analysts, to pressure prices in 2012.
“At current Opec production rates and given demand won’t grow that fast next year, we’ll have stockbuilds which will weaken prices on a fundamental basis, so it would seem that Opec will need to cut,” said Paul Tossetti, senior energy adviser at PFC Energy.
“It is going to have to be led by Saudi Arabia, Kuwait and the United Arab Emirates, since they are the ones that raised production.”
One reason for the September cut in output could be that Saudi Arabia’s own demand for power generation falls after the hot summer months. Buyers of Saudi crude in Asia and Europe on Monday reported no change in their shipments in November, suggesting it has yet to cut exports substantially.
That might change next year when oil supplies should get a sizeable boost from Libya and Iraq.
Iraq, an Opec member exempt from the group’s output policy, expects to turn on the tap on Jan. 1 at one of three new oil export terminals being built in the Gulf. Each of the new export moorings has a capacity of 900,000bpd.
Iraq already exports abut 2.2mn bpd. The expansion reflects efforts by the government and oil companies working at Iraqi oilfields such as BP and ENI .
In Libya, the National Oil Corp estimates the country is pumping 350,000 bpd and says full pre-war production is possible within 15 months. Libyan output was 1.6mn bpd before the conflict.
Analysts at JP Morgan expect Libya and Iraq to add 1.4mn bpd of production before the end of 2012, which means other producers will need to reduce production by up to 500,000bpd to maintain a balance between supply and demand.
“The increase in capacity in Iraq and Libya will force a degree of adjustment from other supplie(r)s in the coming quarters,” analysts including Lawrence Eagles at the bank said in a report.
Any output cuts will of course also be driven by oil prices as well as supply and demand.
Gulf oil officials have said they can tolerate oil below $90, suggesting they will not be rushing to curb exports should prices remain well above $100. Saudi Arabia hasn’t specified a favoured oil price.
Just as unilateral action by Saudi Arabia and its GCC partners boosted Opec output this year, so any cut may well take place outside any formal Opec agreement, analysts said.
Opec has not changed its formal output target since December 2008, and early comments from Opec officials suggest the group’s next gathering on December 14 may result in another “no change” decision that leaves the door open for informal adjustments.
“In the end, it does not matter much,” said Eurasia’s Priddy. “Any Saudi/GCC action will take place regardless.”
Source: Reuters