Saturday, June 25, 2016

Saudi's Crude Oil Inventories Dropping -- Bloomberg -- June 25, 2016; The Tea Leaves Are Swirling


June 26, 2016: The tea leaves suggest that Saudi Arabia is making a huge bet taking a new tack. [The third definition of "tack": change course by turning a boat's head into and through the wind.] The price of oil will be affected by the plummeting pound, the surging dollar following Brexit.
Original Post

Bloomberg headline: oil glut is fading where you would least expect it -- Saudi Arabia.

Earlier this week it was reported that Saudi said it will not increase crude oil production.

Now let's see what the Bloomberg article is all about.
Saudi Arabia, a country nearly synonymous with plentiful crude supplies, is offering one of the strongest signs yet that the glut that has plagued the oil market since 2014 is coming to an end.

Despite near record production, the kingdom’s oil inventories have declined for six consecutive months, the longest stretch since the Joint Organisations Data Initiative started tracking Saudi supply levels nearly 15 years ago.

“The drop in Saudi crude stocks signals the rebalancing has started,” said Amrita Sen, chief oil analyst at consulting firm Energy Aspects Ltd. in London. “Crude stocks are coming off in places where either the data is opaque or the market isn’t paying as much attention.”

With oil traders focusing on supply changes in the U.S. and to a lesser extent in Europe and Japan, the drop in Saudi inventories has gone largely unnoticed. Since October, when Saudi supplies reached a record high, stocks have fallen by 38.6 million barrels as the kingdom provided more crude to the market than it pumped from its oilfields. Over the same period, U.S. crude stocks increased by nearly 61 million barrels.

“Saudi Arabia cannot continue to draw down stocks forever," said Olivier Jakob at consulting firm Petromatrix GmbH in Switzerland. With inventories down, Riyadh “will contribute to the rebalancing” of the oil market in the second half of the year and in 2017, he said.
Much more at the link. The article is archived.

Remember: the Saudis use oil to generate electricity, and they need a lot of electricity for air conditioning and for desalination plants. Recently Saudi Arabia "postponed" plans for major solar farms to relieve the oil sector. The "postponement" was for eight years which suggests Saudi has significant financial problems (this was going to be a very, very expensive project) or there are technological issues with solar panels where the fine dust storms are legendary. 

Data points from the article:
  • Saudi crude oil inventories have been tracked by an independent agency for 15 years
  • Saudi's oil inventories have declined for six consecutive months -- longest stretch in 15 years
  • Saudi's declining inventory has been largely unnoticed
  • October, 2015: Saudi's inventory at record levels; have since fallen almost 40 million bbls
  • over same period, US crude oil inventories have increased by slightly over 60 million bbls
  • Saudi energy minister: "We may have started inventory drawdowns that will continue for the foreseeable future."
  • current Saudi storage: 290 million bbls; lowest level since April, 2014
  • Saudi's current export, domestic burn: 10.5 million bbls/day
  • Saudi's current production: 10.2 million bbls/day
  • May, 2016: preliminary data: the seventh consecutive monthly drop in crude oil inventories; stocks could be down almost another 6 million bbls
  • Saudi uses significantly more crude between June and September: air conditioning
  • within the last year, Saudi has also increased its own refining capacity
  • April, 2016: KSA burned 500,000 bopd at its power stations, the most for that month since 2009
  • traditionally: peak burn in July to August at around double the April rate
  • even if KSA raises its oil production this summer to the all-time high of 10.56 million bopd set in June, 2015, stocks may fall further
The tea leaves are swirling. First observation: I thought Saudi said they could easily get to 12 million bopd.

This graph has been posted many, many times. It's one of my favorites. For all the talk, day in and day out, about Saudi's production capabilities, the graph certainly doesn't confirm that.  Note: US crude oil production practically matches the entire Saudi Arabian "boe" (crude oil + natural gas). The US then doubles its "boe" with natural gas.

Saudi Arabia uses crude oil where the rest of the world generally uses natural gas to generate electricity.

There may be a couple of ways to interpret the Saudi drop in crude oil inventories. I can think of three ways to interpret that data about Saudi inventories decreasing:
  • it's simply re-balancing (the prevailing view, and what the Saudis would have us believe)
  • they can't increase production to the degree that would be necessary to continue the present course of action (perhaps)
  • they have decided that the present course of action is not working, and they will now move to something completely different (a "stealth" unilateral embargo?), Inshallah. 
Remember: the announcement that Saudi was appointing a new minister of energy was made on Saturday, May 7, 2016.
I can hardly wait for the production data over the next six months. I think it may be very, very fascinating.

From an earlier post, June, 2015, one year ago, some data points regarding Saudi Arabia -- some of the data points -- may no longer be valid:
  • Saudi embarked on a $35 billion, 5-year program back in 2012 to sustain oil production
  • Saudi's oil production has hardly moved since 2012
  • Saudi's budget is based on $100 oil
  • domestic consumption of oil and natural gas is increasing in Saudi Arabia
  • apparently the Saudi quest to find natural gas in Rub al Khali failed; one of many links; a better link;
  • Saudi Arabia is embarking on a huge refinery program (see the linked post above)
  • the water situation in the Mideast is getting more and more challenging, and the amount of energy needed for desalination is beyond one's imagination (see the linked post above)
  • Saudi has a huge new terrorist organization to worry about
  • Saudi is engaged in a fairly expensive shooting war
  • President Obama has made it very clear that Saudi is on their own when it comes to security
  • the Saudi oil minister is making some bizarre statements about the end of fossil fuel (bizarre or disingenuous)

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