Riyadh warns against exhausting spare oil capacity

Saudi Arabia's oil minister Prince Abdulaziz bin Salman has again highlighted what he sees as the pitfalls of eroding spare crude production capacity, warning it "has a much dearer cost than what people can imagine".

It follows weeks of tense exchanges between Saudi Arabia with the US over the Opec+ group's decision to cut its output target by 2mn b/d next month. Alongside the UAE, Riyadh holds most of the spare capacity within the coalition. It produced 11.03mn b/d of crude in September, according to Argus' survey, but its stated capacity is around 12mn b/d.

"It is a psychological issue," Prince Abdulaziz bin Salman said today at the Future Investment Initiative in Riyadh. "The market will be driven by different parameters once we get rid of excess capacity. Would people like us to give it a try? I cannot try it because we've been through it three times."

An increase in Saudi crude production during the financial crisis of 2008 only drove oil prices "higher and higher and higher", he said. Riyadh deployed spare capacity to mitigate supply disruption during the first Gulf war in 1990-91 and again during the onset of Libya's civil war in 2011, he said. "Who could have saved the world economy if it wasn't for that spare capacity?"

The Saudi oil minister noted that today's market faces many uncertainties including a potential global recession, the impact of the G7's proposed price cap on Russian oil and the outlook for Chinese oil demand. He stressed the need to be "attentive, pre-emptive and engaged" when addressing these uncertainties, adding that they "could convolute in what we could call the worst energy crisis the world has attended to".

Prince Abdulaziz recalled the early stages of the pandemic in 2020, when Saudi proposals to cut production faced resistance and led to a brief unravelling of the Opec+ partnership. "Had we taken the measures that we as Saudi Arabia called for in March [2020], a good chunk of the damage that happened to the market would not have happened, and the corrective measures that would have started earlier would have helped us mitigate much earlier," he said.

Opec+ ended up reviving its pact in May 2020, implementing a near 10mn b/d cut in response to the rapid drop in oil demand caused by Covid containment measures. The latest Opec+ meeting in October this year resulted in the biggest cut to quotas since that pandemic-induced reduction, putting Saudi Arabia on a collision course with Washington. The White House has threatened unspecified "serious consequences" if the decision is not reversed, including a re-evaluation of US security assistance to Riyadh and a willingness to consult with Congress on anti-trust legislation against Opec. Addressing the Saudi-US relationship, Prince Abdulaziz said: "I think we, as Saudi Arabia, decided to be the more mature guys and let the dice fall."

Friends in need

Riyadh is not indifferent to the concerns of consumer countries facing high prices and challenges over securing supply, according to the prince. The oil ministry has joined state-controlled oil giant Saudi Aramco in engaging with European customers about replacing Russian oil supplies when the EU's embargo takes effect in December, he said.

"We have been approaching our friends in Europe just to make sure," he said. "We are engaged with so many governments… Germany, Poland, Czech Republic, Croatia, Romania and others. They are going through a phase of debottlenecking their supply chains and supply systems to ensure that we can come in."

Aramco supplied 950,000 b/d of crude to Europe last month, compared with 490,000 b/d in September last year, he said. "We'll be the supplier of those who want us to supply them."

By Ruxandra Iordache and Nader Itayim