As hopeful US investors buy everything oil-related on the back of a lower than expected crude build this week (after the biggest build in 30 years the week before), The Kingdom has stepped up overnight and ruined the dream of supply-restrained price recovery as it announced a surge in production output in March to yet another record high [13]. The nation boosted crude output by 658,800 barrels a day in March to an average of 10.294 million a day, which as Bloomberg notes, is about half the daily production from the Bakken formation. WTI Crude prices have slipped by around 2% from yesterday's NYMEX Close ramp highs as it appears Saudi Arabia is not willing to just let this effort to squeeze Shale stall.
Saudi Arabia output surged and hit a new all time high.
[14]
And so Crude is sliding... for now.
[15]
The Saudis did suggest demand would rise (but again would be offset by increased production):
“Higher global refinery runs, driven by increased seasonal demand, along with the improvement in refinery margins, are likely to increase demand for crude oil over the coming months,” OPEC’s Vienna-based research department said. “Given expectations for lower U.S. crude oil production in the second half of the year, these higher refinery needs will be partially met by crude oil stocks, reducing the current overhang in inventories.”
And as a reminder [13], Saudi oil production is already record high. Now it is recorder.
As reported last week, instead of leaving its own production flat in an attempt to stabilize oil prices and hit its "optimistic" outlook sooner rather than never, Saudi Arabia would boost production quite sharply to claw back market share. Specifically al-Naimi, revealed that the kingdom’s oil production in March was 10.3-million barrels a day – a record high. "Saudi Arabia is going for it," Olivier Jakob of the Swiss energy consultancy PetroMatrix said on Wednesday as Brent crude fell by about 1.3 per cent.
So what is Saudi Arabia's reasoning to "make up in volume what it loses in price"? Here is Globe and Mail's explanation:
Why is Saudi Arabia opening the spigot? There is no doubt that country’s own domestic demand is rising, thanks to heavy investment in new refineries, requiring more production. But it also appears that Saudi Arabia is making renewed push for market share for fear that a gusher of Iranian oil will soon hit the export markets as the Iranian embargo is ratcheted back. “They will not want to abandon any market share to Iran,” Mr. Jakob said.
The problem for oil producers and investor is that the Saudis are not acting in isolation. In March, both Iraq and Libya managed to boost production in spite of the violence and chaos in those countries. As a result, OPEC production in March was about 31.5-million barrels a day, an increase of 1.2-million barrels over February and 2-million barrels over March, 2014. The March figure is well above the second-quarter estimate put out by the International Energy Agency.
At the same time, U.S. production is surging, creating burgeoning stockpiles of oil. The combination of rising U.S. production and rising Saudi production can only be bearish for oil prices. The prospect of oil testing its January low should not be ruled out, especially if Iran is given the green light to ramp up exports.
The good news for oil investors is that low prices could well trigger a repeat of the consolidation round seen in the late 1990s, which was another period of extremely low prices. In that era, the biggies – BP, Chevron and Exxon – all did monster deals that significantly boosted their global clout. The trick, of course, is to pick the right company. The premium paid on BG’s share was 50 per cent over BG’s closing prices on Tuesday.
Which means higher 2015 highs for oil are likely imminent as physical supply and demand are once again utterly irreelvant for this most financialized of commodities.
