Dow Jones Newswires /London
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A view of Saudi Aramco’s research and development centre. Aramco has doubled the number of rigs exploring for oil and maintained mature fields at high yields using the latest technology, said Bernstein Research analyst Oswald Clint |
The report amplified previous warnings of a supply-constrained oil market by the US banking giant, which in recent months has repeatedly questioned the ability of Saudi “spare capacity” to meet growing demand. If the market becomes convinced of the Goldman view, prices could rise sharply.
However, Goldman’s conclusion about Saudi capacity is at odds not only with statements from officials at the Organisation of Petroleum Exporting Countries, but some influential market analysts, who say the exporters’ group still has enough headroom in its oil production to restrain prices.
The burgeoning debate between these two camps could be an additional source of volatility in the oil markets in the coming period.
The Goldman report helped send oil prices up Thursday. At 1246 GMT, August Brent crude was up $2.68 at $116.30 a barrel, buoyed also by positive economic data.
Recent history shows a close correlation between spare production capacity and oil prices. When spare capacity is low, the risk of a supply disruption grows and prices rise. Two of the strongest periods of oil price inflation-2003 to 2005 and 2007 to 2008-coincided with Opec spare capacity falling to historic lows.
The International Energy Agency, which represents major energy consuming countries, estimates that Saudi Arabia, which holds most of Opec’s spare capacity, is capable of producing up to 12mn bpd, compared with actual production in May of 9mn bpd. IEA officials have largely dismissed the skepticism about Saudi output capacity.
The IEA estimate is a little below the official Saudi figure of 12.5mn bpd because it has stricter criteria for spare capacity, only counting fields that could be started up within 30 days and sustained for at least 90 days, said David Fyfe, head of the agency’s Oil Industry and Markets Division.
Even so, this estimate leaves the Saudis with plenty of headroom, even if they follow through on plans to raise output to 10mn bpd.
Rather than working from official Saudi figures, Goldman extrapolates from the previous peak in Saudi oil production of 9.5mn bpd back in 2008. It is reasonable to assume this was the maximum possible because, “the oil price went above $100 a barrel and provided the incentive to produce as much as possible,” Goldman said. Adjusting this for new projects and the natural decline of mature fields, Goldman arrived at its current estimate for Saudi spare capacity of between 10.5mn bpd and 11mn bpd.
In May, Goldman raised its Brent crude forecast for the end of 2012 to $140 a barrel from $120 a barrel and its 2011 year-end forecast to $120 a barrel from $105 a barrel.
Others say that years of heavy Saudi investment has substantially increase capacity since 2008.
“The kingdom spent money, built facilities, developed fields and drilled wells to deliver 12.5mn barrels when needed,” said Sadad al-Husseini, who was a head of exploration at Saudi Arabia’s national oil company Saudi Aramco until 2004.
Aramco has doubled the number of rigs exploring for oil and maintained mature fields at high yields using the latest technology, said Bernstein Research analyst Oswald Clint.
Opec insists it has ample spare capacity to meet future demand. “Any customer who will go to any of member countries, ask for more oil, they will get it,” said Opec Secretary General Abdalla Salem El-Badri. “We won’t see a repetition of 2008,” when prices spiked to almost $150 a barrel because the group’s spare capacity has doubled since then, he said.