Price war in the global oil market, it seems, will never end. Saudi Arabia began to sell its huge reserves and the volume fell to the lowest level in 20 months. At the same time, the Kingdom decided to strengthen its tanker fleet, making it the largest in the world. All this suggests that oil prices in the foreseeable future hardly will go up.
Battle in the oil field
Policy of the Saudi Kingdom is considered to be one of the main reasons for the collapse of world oil prices that occurred in 2014-2015. Against the background of rapid growth of shale oil in the US and crude oil in Iraq, the Saudis decided not to reduce the already high level of domestic production. On the contrary, the Arabs began to pump the black gold even more aggressive, in the end, several times breaking records for production.
All this was done that’s why. First, Riyadh were afraid of losing their position in the market. Secondly, the Royal family decided it is reasonable that at high oil prices, those shale producers will win, and will continue to increase the volume. And if you secularity market for high — prices will fall and Americans will be forced to leave, especially if we take into account the small size of their companies, and high debt load.
The result started a game of “who will blink before”: the Saudis also bear losses, but suffer due to the huge accumulated reserves, but in America the rate of production is steadily declining, as well as in several other States where the cost of oil production is high.
By the end of last year, the game involved and even Iran, which lifted sanctions. For several months the Islamic Republic has increased production by a million barrels a day, which led to a collapse of quotations at the beginning of 2016. All attempts at least to freeze production at record levels in January-February were not successful.
Saudi Arabia has responded to all this by further increase of production volumes. In may, according to Bloomberg, rose to 10.55 million barrels per day — the second highest figure for all time of observations (record on the level of 10.56 million barrels were delivered in June last year).
The oil reserves of Saudi Arabia fell to the lowest since Aug 2014 — Kingdom actively sells hydrocarbons
However, oil prices all spring crept up and Jun finally exceeded the psychologically important level of 50 dollars per barrel. In the range of 45-50 dollars black gold in recent weeks and was fixed.
Reserves print…
It would seem that goals have been achieved. The price dropped to such an extent that the weak marginal producers are forced to leave the market. At the same time, it is bearable from the point of view of losses for the Saudis themselves. But apparently, the current situation suits them not to end. Wednesday, July 20, it became known that commercial oil reserves in the Kingdom, fell to the lowest in 20 months — up to 289 million barrels. Since October they fall down continuously and, in total, decreased by 12 percent.
This decline can be attributed to a complex of factors. First, to keep the oil reserves are not something that would be expensive, but also has its price. In this situation it would be reasonable to release some capacity until the market is ready to buy oil at a reasonable price.
“Sale of inventory, minimizes storage costs, exploiting marketing strategy to refineries, which is to be purchased, while raw materials fell. Among the refiners operated, the risk of higher prices, which is of concern to producers of gasoline and diesel in the first place,” explains the Director of analytical Department of investment company “Golden Hills-Kapital AM” Mikhail Krylov.
In addition, Saudi Arabia is forced to compensate for the increase in domestic consumption in recent years. In addition to the General increase in demand within the country, there are seasonal fluctuations. In summer, the Kingdom needs large volumes of fuel to generate electricity, the difference in consumption with the winter season can reach 400 thousand barrels per day. At the same time, exports should not suffer because the fight for each consumer on the world market is fierce. That’s the reason for the sale of reserves.
However, data for June show that exports to Saudi Arabia also increased by approximately 5 percent, which tells about the desire of the Arabs not just to close the gap arising from growth in domestic demand, but also to put pressure once again on the world market. “The market conditions are favorable to reduce oil prices by 15-20 percent. The selected strategy of sale of stocks helping Saudi Arabia with more flexibility to adapt to the demand”, — says Mikhail Krylov.
Riyadh is gradually increasing its oil production, which could lead to another collapse of quotations
The more that Americans seem to come to life after the catastrophic fall in prices early in the year. At least the number of oil rigs in the US reached the bottom, and last week it grew by seven units. Yes, the production volumes are falling — the decline has reached about 12 percent to last year’s peak, but it is unclear how long it will last. In such circumstances a further reduction in prices will finish the slate industry, guaranteeing her a long decline. Will it be possible to achieve this goal — a question to which a precise answer now, no.
…and tanker Armada is growing
I wonder what Arab state has decided to sell the reserves rather than to increase production. Although it is believed that the ability of such the Kingdom is potential to expand production is about two million barrels per day. Whether really there is such power, no one checked. Information secret, and all assumptions — nothing more than expert evaluation. There is a temptation to say that Saudi Arabia has exhausted its potential for mining, but there is a more prosaic opinion.
“Saudi Arabia could increase production, it has a reserve capacity of about two million barrels a day. However, to extract most of the necessary new infrastructure and investment; the remaining part contains too much sulphur, which makes the oil heavy and partially recyclable. For example, to refineries in the United States,” says chief analyst at Promsvyazbank Ekaterina Krylova.
At the same time, in her opinion, such a move by the Saudis could have the opposite effect — namely to raise world prices. “The direct impact on prices from a reduction of the reserves of Saudi Arabia at the moment, no. However, the fact that the country is not willing to greatly increase production, preferring to print the inventory, improves the global fundamental picture of the oil market, which in turn supports quotes” — says the analyst.
In parallel, Riyadh has taken another important decision by scheduling to increase its tanker fleet to 61 large vessel — that is just one-third. It will be the biggest in the world. This may indicate the desire to increase exports. In addition, a large fleet will provide the opportunity to boost operational reserves in case of a new Packed market. In combination with increased spending of oil reserves, this measure clearly indicates the willingness of Saudi Arabia to a collapse in world prices. So, it is expected and other participants of the world market, in which the Kingdom now took the initiative.
Dmitry Migunov
