Output Set For Slow (And Possibly Negative) Growth


BMI View: Pressured by rising production from Iraq and non-OPEC members, as well as bearish sentiment regarding global demand, we expect a decline in Saudi output in 2013 compared to 2012. Looking ahead, we see slow gains in production with downside risks as Saudi Arabia seeks to balance growing supplies and slowly recovering demand while keeping prices high enough to support its fiscal expenditures.

With a hold on the world's spare production capacity, Saudi Arabia maintains an immensely influential role within OPEC and the global oil market. However , growing supplies of both OPEC and non-OPEC crude have seen the country abandon plans to expand production capacity from around the current 13mn barrel per day (b/d) mark to 15mn b/d. In regards to production itself, much like with spare capacity, we see little cause to support a dr amatic increase in output after heights reached in 2012.

While we continue to expect some increases in crude output from Saudi Arabia over the latter half of the year, the gains are likely to be more subdued than initially anticipate d as North American production continues to surprise to the upside . This has left West African and , increasingly , G ulf producers scrambling for a share of the Asian market where economic growth appears to be weaker than hoped . Amongst OPEC members, growing production in Iraq - notwithstanding abundant risk s to the downside - are provoking some concern within OPEC that Riyadh as the de factor leader may soon be forced to confront by pressing for Baghdad to return to the quota system.

Production Inches Upward After End-2012 Cut
Saudi Arabia Monthly Oil Production ('000b/d)

For 2013 , we expect total oil production to average 11.4mn b/d, a 3% year-on-year decline from 2012's 11.7mn b/d. The ramp-up of a major field, Manifa, and increased demand from both domestic consumption and from a major downstream expansion underway should offer some support to demand for Saudi crude alongside better global growth from 2014.

Slow Flows Ahead With Risks To Downside
Saudi Arabia Oil Production, Consumption & Net Exports ('000b/d)

However, b arring any supply outages or unanticipated uptick in global demand, we see more downside than upside risk s to our current forecast which we will watch closely watch over the year. Over the long er term, we expect slow gains in output, but again, given growing supplies elsewhere and a state d comfort with prices around the US$100/bbl mark, we cannot preclude a more dramatic cutback in Saudi production as has been the case in the past. Indeed , a recent study by the Centre for Global Energy Studies found that at an average OPEC Basket price of US$100/bbl, Sa udi Arabia would need to produce just 8.3mn b/d to fund current spending plan s, leaving room for a larger cutback in capacity should it be deemed necessary.

Yet the long term risks of growing supplies, flat or negative consumption growth in the developed world, and rising budgets at home underscore threats to the Kingdom , which remains dependent on oil for around 80% of its revenues . According to the Arab Petroleum Investments Corporation, the current breakeven price for Saudi crude is US$94 /bbl . The elevated price is a reflection of rising social spending expenditures and commitments that have been made in the wake of the Arab Spring. Another analysis conducted by the Jadwa Investment, based in Riyadh, determined th is break-even price will reach US$118/bbl by 2020 . At this price live level, the country's cash reserves could fall rapidly to maintain spending levels, which in turn would mean the breakeven price per barrel could further increase.

This article is tagged to:
Sector: Oil & Gas
Geography: Saudi Arabia