Goldman Sachs Saudi Arabia Spare Capacity
Goldman Says Saudi Arabia Is Misleading the World About Oil Production
By James Herron
Goldman Sachs has accused Saudi Arabia, the world’s most important oil supplier, of misleading the world about its oil production since late last year.
If true, this allegation would mean that the Organization of Petroleum Exporting Countries has far less spare production capacity to make up for the disruption of Libyan supplies than it claims, leaving oil markets in a much more perilous situation than anybody realizes.
After the outbreak of serious civil violence in Libya late last month shut down around at least half the country’s 1.5 million barrels a day of oil exports, Saudi Arabia stepped in to fill the gap. It promised to pump an extra 700,000 barrels of oil a day, taking its oil production to 9 million barrels a day, to ensure that nobody ran out.
This was a typical move from the Saudis, who like to play the role of Federal Reserve for the oil world, using their unparalleled influence to prevent the oil price surging too high or dropping too low. However, much like naysayers who claim the Fed is playing fast and loose with the U.S. dollar, Goldman believes Saudi Arabia isn’t being straight with the oil market.
Analysts at Goldman Sachs said in a research note Tuesday:
“We believe that Saudi Arabia has been producing 0.5 million to 1 million barrels a day above the official numbers since November…implying that OPEC spare capacity is significantly lower than reported.”
Spare capacity is important, because the size of this supply buffer has a close relationship to oil prices. According to analysis by Bernstein Research last week, when spare production capacity diminishes, prices tend to rise because markets are more fearful of unexpected supply disruptions.
If Goldman’s hypothesis is correct, “this would imply that OPEC spare capacity could actually have dropped below 2 million b/d already.” This is a level last seen in 2008, when the oil price hit $147 a barrel.
Saudi Arabia’s Oil Minister, Ali al-Naimi, flatly contradicted this estimate Tuesday, saying the country has 3.5 million barrels a day of spare capacity, which would put total OPEC spare capacity above 5 million barrels a day.
Goldman’s belief that Saudi has been secretly producing extra oil for months is based on two observations.
Firstly, data from the International Energy Agency suggested that late last year the depletion of oil held in storage around the world stalled, despite oil demand increasing and supply remaining broadly unchanged. It is possible that data on oil storage volumes or oil demand are wrong, Goldman says, but more likely is that less oil was taken out of storage because OPEC supply was higher than reported.
Secondly, the price gap between the price of heavy crude, of the kind Saudi was holding as spare capacity last year, and light crude produced elsewhere, “are wider than our modeling would predict, assuming the official OPEC supply numbers are accurate,” Goldman said.
Saudi-type crude is cheaper than it should be, suggesting there is more of it around than official figures suggest.
“More importantly, the heavy-light spreads widened to these levels long before the turmoil in Libya started, indicating that large volumes of Saudi spare capacity have already come back to the market,” Goldman said.
The official figures, supplied by OPEC, say that Saudi Arabia produced 8.27 million barrels of oil a day in November, rising to 8.43 million barrels a day in January, the most recent month for which figures are available. Saudi officials said last month that it has raised production to over 9 million barrels a day to make up for the Libyan shortfall.
OPEC stands by these figures and the IEA, which represents the interests of major oil consumers and is no great buddy of the Saudis, is closer to the OPEC figures than to Goldman’s hypothesis. It puts Saudi output at 8.5 million barrels a day in November and 8.6 million barrels a day in January.
Goldman’s evidence may be circumstantial, and the bank isn’t so impolite as to directly accuse the Saudis of lying, but the implication is clearly there in its report. Either Saudi Arabia hasn’t noticed that it’s producing an extra 1 million barrels a day, which is scarcely credible, or it’s been knowingly providing false figures to the market.
Of course, it is also possible that Goldman–a controversial institution that these days probably has as many detractors as the Saudis–is wrong this time.