Kuwait Promises To Increase Oil Production In Case  Of War

With the global oil market currently oversupplied to the tune of an estimated 2 million barrels per day, oil producer group Opec has struggled to formulate an effective strategy aside from “let the market sort it out.” For decades Opec played a price-setting role by increasing production to boost supply when prices were deemed too high. And the producers throttled output back to constrain supply and thus add price support during periods of oil price decline.

But things are different now. At a basic level, the current supply of oil exceeds demand by such a wide margin – due in large part to the US oil production boom – that Opec producers would need to drastically cut their output in order to balance the market. Additionally, de facto Opec leader Saudi Arabia would be forced to do most of the heavy lifting because they maintain the greatest spare production capacity in the group, meaning they can quickly ramp production up and down. It is widely believed Saudi Arabia has the ability to produce over 12 million b/d.

Analysts at Energy Intelligence’s Research & Advisory Group estimate a cut of 4.7 million b/d or more would be required to bring supply and demand into closer balance which would support oil prices. Several Opec nations like Venezuela, Nigeria and Libya face domestic unrest that constrains their ability to make substantial oil production cuts given government reliance on oil export revenue.

That leaves the Saudis to bear the brunt of any oil production cut burden, and with Saudi production currently estimated at around 9.8 million b/d, cutting some 4 million b/d could simply be too technically challenging and financially painful. The Saudis made a major production cut in the 1980’s and it took decades to regain the market share lost as a result.

The Saudi government has over $700 billion in net foreign currency reserves and almost no debt, which gives them some breathing room to wait out lower oil prices, but other Opec members with weaker balance sheets will increasingly ratchet up pressure to defend prices as long as bear market conditions persist.

The new Saudi Arabian King Salman recently made extensive cabinet leadership changes, but has thus far left Ali al Naimi in charge of the oil ministry. However, al Naimi is nearing retirement and it is widely expected a new oil minister could be appointed in the coming months. If oil prices remain depressed, a new oil minister could be forced to alter Saudi policy, even if that means cutting production despite the near-term pain it would cause. At some point, “letting the market sort it out” may prove untenable.