When the solidarity of Opec’s GCC members proved not to be enough to reach an agreement on raising the oil producer group’s output, Saudi Arabia decided to flex its muscles and take matters into its own hands.
The world’s largest oil exporter has committed to raising crude output up to 10 million barrels a day (b/d) if required in order to offset the continued reduced output from Libya, as well as to try and keep prices under control.
The Opec meeting was the first time in more than 20 years that a consensus had not been reached for raising production.
Saudi Arabia, the UAE, Qatar and Kuwait agreed that raising production by 1.5 million-b/d to 30.3 million-b/d was a sensible approach to curbing the escalating prices, but the remaining members led by Iran and Venezuela disagreed.
The difference in opinion caused Ali al-Naimi, Saudi Arabia’s Oil Minister, to say that “it was one of the worst meetings [Opec has] ever had”. Such a response from the usually politically savvy Al-Naimi was rather unusual, indicating that a rather robust debate occurred in Vienna.
The question now arises as to whether the kingdom’s heavier more sour crude will make a suitable substitute for Libya’s sweet light crude that the European markets prefer. Al-Naimi has stated that the kingdom will produce a new blend to compensate for the Libyan crude, but this is still not the same.
“I’m not surprised that there was dissension in the [Opec] ranks when you look at what is going on politically in the Arabic speaking world,” says Thomas Leaver, chief executive officer of the Dubai Mercantile Exchange. “[Saudi Arabia] was producing over its quota anyway and I think that raising it was window dressing rather than a change to the underlying dynamic of the market.”
The move by Saudi Arabia sent prices into a slight decline, but Brent crude is still trading at between $115-$119 a barrel.
Riyadh obviously believes that the global market for its crude is going to increase because oil major Saudi Aramco has also stated that the offshore Manifa field will go into full production of 900,000-b/d in 2014, a full 10 years earlier than initially planned.
However, one Saudi Arabia-based oil industry executive thinks that the decision to fast track Manifa’s production has as much to do with domestic gas demand than potential global shortages of crude.
“The kingdom needs all the gas it can get and the additional [120 million cubic feet a day] is a significant amount,” says the source. “This kind of volume should not be discounted.”