Riyadh may take heart from the fact its new production is not all coming on line while prices are below $110. Any further price drop and Saudi Arabia may regret chasing capacity.
With oil prices dropping by more than a quarter since hitting record highs in July, and much of the global economy slowing to a standstill, the urgency for bringing on new crude supplies is starting to dissipate.
Saudi Arabia is in an unusual position. Its pledge to produce record levels of output earlier this year were largely ignored by traders, who instead took their cues from geopolitical uncertainties and price speculation to ramp up the price.
Now the kingdom finds itself with crude production of about 1 million barrels a day (b/d) higher than a year ago, while demand from the US has dropped by the same amount over that period.
If not for significantly higher demand in India, China and the Middle East, Riyadh could find itself in the unexpected position of not having enough buyers for its products.
There certainly seems to be much less anxiety in Saudi Aramco’s ranks now than earlier in the year over its failure to hit deadlines for the 500,000-b/d Khursaniyah oil increment, the largest field due to come on line in the world this year.
Missing the original completion date of December 2007 was largely due to labour and material shortages. But the fact that the delay will now reach a full year is a serious blow to Aramco’s reputation as one of the most efficient companies in the sector.
There are further potential delays for Aramco. The new, high-profile 1.2 million-b/d Khurais field looks set to face delays of more than six months, while expansion projects at fields including Shaybah and Nuayyim also look set to be put back.
With analysts expecting prices to weaken further, Riyadh may take heart from the fact that its new production is not all coming on line while prices are staying below the $110 mark.
Any further price drop, however, and the kingdom may yet regret its decision to chase capacity jumps in an overheated oil market.