Increased Oil Production Offsets Effects of Geopolitical Tensions

Saudi Arabia’s Oil Minister Ali al-Naimi said on May 12 that his country would make up for any shortfall that may result from the conflict in Ukraine. After pro-Russian eastern separatists held a referendum last weekend and voted to secede from Ukraine, many in the West worried that another round of annexation by Russia was imminent.

May 17, 2014 at 2:42PM

This article was written by Oilprice.com -- the leading provider of energy news in the world. 

Oil prices briefly hit a three week high this week as geopolitical tension and strong demand tighten oil markets.

Saudi Arabia's Oil Minister Ali al-Naimi said on May 12 that his country would make up for any shortfall that may result from the conflict in Ukraine. After pro-Russian eastern separatists held a referendum last weekend and voted to secede from Ukraine, many in the West worried that another round of annexation by Russia was imminent. Russia has thus far showed restraint, but Naimi sought to reassure the markets that a disruption from Russia would not endanger global supplies, as Saudi Arabia would step in. "We are willing to supply any shortage which may arise," he said at a conference in Seoul.

Naimi also said that there is no reason to change OPEC's current output quota of about 30 million barrels per day (bpd). "Supply is highly sufficient, demand is great and the market is fairly stable," he said. "There is no reason for a change. Absolutely no reason."
Given current market conditions, Naimi said that OPEC is targeting $100 per barrel. "One-hundred dollars is a fair price for everybody -- consumers, producers, oil companies," he said. "It's a fair price. It's a good price."

But on May 15, the International Energy Agency said that OPEC would have to pump more oil in order to meet demand for the rest of the year, which the agency revised upwards by 1.4 percent to a record 92.8 million bpd. IEA projects that OPEC will need to pump 30.7 million bpd for the second half of this year – a production rate that is about 800,000 bpd higher than the cartel produced in April.

Saudi Arabia insists it has more than enough spare capacity to meet global demand – it is pumping 9.6 million bpd and has a total capacity of 12.5 million bpd, so its production can be ramped up depending on market conditions. The IEA is a little less certain that OPEC will be able to react quickly. "While OPEC has more than enough capacity to deliver, it remains to be seen whether it will manage to overcome the above-ground hurdles that have plagued some of its member countries lately," the agency said.

Meanwhile, despite the fact that Russia did not move swiftly to annex eastern Ukrainian provinces after the referendum as many had feared, Russia's Foreign Minister Sergei Lavrov offered a dire assessment of the situation in eastern Ukraine. "When Ukrainians kill Ukrainians, I believe it's as close to civil war as you can get," he said.

While the geopolitical tension from the Ukraine crisis is pushing up oil prices, there are several trends pulling them down.

It is looking more likely that Libya will be able to restore some of its lost production. According to Libyan officials, protesters have agreed to reopen critical pipelines carrying crude from fields in the country's western region. The standoff between the official government in Tripoli and eastern rebels has slowed Libyan oil output to a trickle. However, after pushing the political crisis to the brink, the two sides have reached a diplomatic resolution. This paves the way for more Libyan oil to come back online, and government officials have stated that production could quickly rise to 500,000 bpd, double current levels.

Furthermore, the U.S. Energy Information Administration released new data that showed that U.S. oil production has hit a 28-year high. Also, crude oil stockpiles are close to record levels on higher output.

Higher oil production from Libya and the U.S. are offsetting tight market conditions elsewhere.

The impressive growth in production has the U.S. considering relaxing its ban on crude oil exports, as Secretary of Energy Ernest Moniz hinted at on May 13.

And in an interesting response, Saudi Arabia's Ali al-Naimi said on May 15 he isn't worried about competition from U.S. oil exports. "We will be very happy to see different producers increasing their production and going into the international market," he said at an energy meeting in Moscow. "Remember, the world consumes every year over 30 billion barrels of oil and somebody has to replace that so the more oil produced the more is replaced."

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Written by Nick Cunningham at Oilprice.com.

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