Saudi Arabia will be “reluctant to exhaust” its “substantial” spare capacity, according to oil and gas analysts at BMI Research.
“Questions are being asked as to the extent to which Saudi Arabia will increase its production, to offset shortfalls elsewhere in the market,” the analysts said in a report sent to Rigzone.
“We believe that, while a large volume of barrels will be returned over the coming months, likely upwards of 1 million barrels per day, the Kingdom will be reluctant to exhaust its substantial spare capacity,” the analysts added.
In the report, BMI said Saudi Arabia has sufficient capacity to keep the market “comfortably supplied”, but said the benefits of this are outweighed by the costs.
“The Kingdom has reaffirmed that it holds 2 million barrels per day of spare capacity, which implies total capacity of around 12 million barrels per day. Full utilization would be sufficient to keep the markets well-supplied and prices in check,” the analysts said.
“However, bringing all its spare capacity into play would incur a significant cost, while production would take time to bring fully online; increasing crude output from 11 million to 12 million barrels per day would likely take in the order of six to 12 months to fully ramp up,” the analysts added.
BMI added that it was unclear that there will be a market for the additional barrels, and how sustainable that market would be.
“U.S. shale potential is still largely unknown and the outlooks on markets such as Iran, Libya and Venezuela are highly uncertain,” the analysts said.
“An increase in production of this magnitude would wipe out the bulk of remaining spare capacity, globally. Saudi Arabia, and OPEC more broadly, would lose its key lever on the global oil market, which would leave prices heavily exposed in the case of an additional supply shock,” the analysts added.