Iraq output jump ups burden on Saudi to cut crude exports

Bloomberg/London

Iraq’s biggest jump in oil production since 1998 is increasing the burden on Saudi Arabia to lower crude exports to prevent price declines next year.

The kingdom curbed crude output in November to a 13-month low, according to Opec. Iraq plans next year to pump as much as it did when Saddam Hussain came to power three decades ago, its oil minister said on December 9. Supply will also rise in Libya and Nigeria, while the US experiences an oil shale bonanza.

“Saudi Arabia’s dilemma is that while it is the key Opec player willing to cut back oil production in order to sustain prices at desired levels, it is also accommodating Iraq’s rising output and market share,” said Julius Walker, global energy markets strategist at UBS Securities in New York. “Ultimately, there will need to be an agreement between the two as how to balance these ambitions.”

Saudi Arabia needs to keep prices high enough to fund social spending plans without incurring the wrath of consumers for hurting the global economy. Iraq, now the second-biggest supplier in the Organisation of Petroleum Exporting Countries, has a different priority: to rebuild its industry after decades of war and sanctions.

Arab states are spending billion of dollars on housing and local infrastructure projects. Saudi Arabia has committed more than $600bn in social and infrastructure projects in coming years.

Iraq’s production surged 650,000 bpd this year to 3.35mn, the biggest annual gain in 14 years, according to data compiled by Bloomberg, amid assistance from foreign oil companies that are paid a fixed amount per barrel produced, regardless of international price levels.

The Middle Eastern state plans to boost output to an average 3.7mn bpd in 2013 and at some point in the year match the 1979 record of 3.8mn, Oil Minister Abdul Kareem al-Luaibi told reporters in Vienna on December 9.

The nation has been free of strict Opec quotas since 1998 and the resumption of any allocation is a “sovereign issue” rather than a decision to be made by an organisation, Falah al-Amri, Iraq’s governor on the Opec board, said on December 12.

Brent crude may sink to $88 by June if Opec fails to rein back supply, according to Leo Drollas, chief economist at the London-based Centre for Global Energy Studies, which was founded by former Saudi Oil Minister Sheikh Ahmad Zaki Yamani in 1990.

Saudi Arabia’s task will become more difficult should Iran resolve its standoff with the international community over nuclear research and resume pumping oil at normal rates. Sanctions against Iran, once Opec’s second-biggest producer, have cut its exports by 50%, according to the International Energy Agency.

While acknowledging its output will exceed customer needs in 2013, Opec refrained from cutting its group target at a meeting in Vienna on Wednesday, judging prices were high enough for now. Iraq, Iran and Saudi Arabia also failed to agree on the appointment of a new Opec secretary-general, opting instead to keep Abdalla El-Badri in the role for a further year.

Saudi Arabia reduced its output to 9.67mn bpd last month, according to a monthly report from Opec that cited secondary sources for its data. In its own direct communication to Opec, the kingdom said November production was even lower, at 9.49mn bpd.

The country can tolerate crude oil prices falling no lower than about $90 a barrel, according to Jamie Webster, a Singapore-based consultant at PFC Energy.

The CGES estimates that Saudi Arabia’s budget-balancing price is $95 a barrel, more than $10 below current levels.

National Commercial Bank, Saudi Arabia’s largest lender by assets, said in a November 27 report that the kingdom’s budgeted oil price for next year is $65.

Demand for Opec’s crude will shrink to 29.7mn bpd in 2013, the organisation’s secretariat said in a statement at the end of its meeting in Vienna. That is 300,000 bpd less than its official target and 1.1mn a day below November’s actual output, Opec data show.

“Opec is overproducing, and the Saudis need to cut,” Roy Mason, founder of Halifax, England-based tanker tracker Oil Movements said by phone on Thursday. “It will be the Saudis taking that initiative.”

The global economy is unlikely to be booming next year and there is more chance that oil demand will tumble than surge, possibly requiring Opec to reduce supply by as much as 1mn barrels a day, Mason said. “By late-February to March, the spring season will be emerging and it will be clearer to them what refiner demand is going to be in the second quarter.”

Iranian oil production, which slumped to 2.65mn bpd in October, the lowest level since February 1990, may climb if a new government can come to an agreement with Western nations, according to JBC Energy GmbH.

Libya, rebuilding its oil industry after last year’s uprising against Muammar Gaddafi, plans to raise output to 1.7mn bpd next year from about 1.5mn a day this month, Oil Minister Abdulbari Al-Arusi said in Vienna.

Nigeria, Africa’s largest producer, expects output to reach normal levels in the first quarter, Oil Minister Diezani Alison- Madueke said after the Vienna meeting. Output was hampered in the past months by floods, theft and pipeline leaks that forced several producers, including ExxonMobil Corp, Royal Dutch Shell, Total and Eni, to halt pumping, curbing national production by as much as 500,000 bpd.

Outside of Opec, the US is producing oil at the fastest rate in almost two decades, using horizontal drilling and hydraulic fracturing, known as fracking, to unlock shale resources in North Dakota, Texas and Oklahoma. The nation pumped 6.85mn bpd in the week to December 7, the most since January 1994, and met 83% of its energy needs in the first eight months of 2012, the Energy Department said.

Opec ministers plan to meet next on May 31, by which time the group will have a better notion of how economic growth and supply are affecting 2013 prices.

Opec has “rolled over the whole discussion you need to have about the Iraqis, on how to bring in production,” PFC’s Webster said in Vienna. “The timing of the discussion is going to be dictated by the market.”