Saudi Arabia is taking steps to calm the oil market, boosting exports, filling up strategic oil stocks overseas and tapping oilfields to expand production capacity.
The moves by the world’s largest oil producer would be welcomed by the White House as it battles the negative impact of rapidly rising fuel prices. They come as oil prices surge above $125 a barrel, the highest since the crisis of 2008, and set record highs in a number of currencies, including the euro and sterling.
Crude oil prices have surged on a combination of stronger than expected demand in Asia, supply disruptions in countries from South Sudan to Colombia and the impact of the forthcoming US and European sanctions on Iranian oil exports.
Riyadh has not publicly disclosed any of its moves, but western officials and oil traders said the kingdom was taking steps to try to bring oil prices towards $100 a barrel. The position of Riyadh could become clearer later this week during a meeting of oil ministers of the Gulf Co-operation Council in Doha, the capital of Qatar.
“Something must be done to damp market sentiment,” a Gulf official told me on Monday. At a recent meeting of oil producers and consumers in Kuwait, several Opec ministers warned that oil prices were now “on the high side”, suggesting that the cartel, led by Saudi Arabia, is starting to worry about rising energy costs.
In Kuwait last week, Ali Naimi, Saudi oil minister, said the kingdom remained “poised to make good any shortfalls – perceived or real – in crude oil supply”. The promise to offset “perceived” shortages goes beyond previous statements by Saudi officials pledging only to make up for actual disruptions in the market.
The Saudi measures include a sharp boost in exports to the US for April and May. Vela, the shipping arm of the state-owned Saudi Aramco, has hired the largest number of supertankers in years to move oil from the Gulf to the US.
Omar Nokta, of Dalham Rose & Co, a specialist investment bank in the energy sector, said that so far this month Vela had hired 11 very large crude oil carriers, each capable of shipping 2m barrels, to deliver oil to US-based refiners.
“In 2011, Vela fixed one VLCC to the US every other month,” he said in a note to clients. “This is the first time in several years for Vela to hit the market with such volume – and in such a short timeframe,” he added.
Riyadh also appears to be storing crude oil in overseas locations in anticipation of a surge in demand for Saudi oil later this year, according to the International Energy Agency. The kingdom used the same storage tactic last year to deal with the supply shortage created by the civil war in Libya, officials said. The kingdom held stocks in Rotterdam in the Netherlands, Sidi Kerir in Egypt and Okinawa in Japan.
Riyadh is also restarting fields that were shut down three decades ago, in an effort to maintain a big cushion of spare production capacity. The moves to boost production capacity are not a response to short-term oil prices, but part of a longer-term strategy to maintain a large buffer of spare production capacity, officials said.
Yet the moves to bring more oilfields on stream would be welcomed by the market, which is keeping a watchful eye on Saudi Arabia’s total production capacity.
Saudi Aramco plans to return the Damman field into production, the kingdom’s first facility that produced oil in 1938 and was mothballed in 1980, according to the IEA.
Saudi Aramco also fast-tracked last year the development of the Manifa oilfield.
Riyadh is using the largest number of drilling rigs in four years in its effort to boost its long-term production capacity, according to estimates by Baker Hughes, a leading oil services company that publishes benchmark estimates of rig use.
Baker Hughes estimated that there were 77 rigs operating in the kingdom in January, up 30 per cent from a low point of 59 a year ago and near the all-time high of 79 rigs set in late 2007 and early 2008 when oil prices surged towards a record high.
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