Saudi Arabia Offers Hope For An Oil Price Rally

Crude oil prices hit a 10-week low on Tuesday, but one piece of data from Saudi Arabia could provide a glimmer of hope for those longing for an oil price rally.

Saudi Arabia is burning through some of its oil inventories as exports combined with scorching domestic demand exceed its total production. In 2015, Saudi Arabia built up crude storage levels to a record high, as the kingdom stepped up production in the face of a global supply surplus. As other producers have cut back on production, there is more room for Saudi and OPEC to export. At the same time, domestic demand is rising quickly in Saudi Arabia.

In order to meet that demand and also pursue greater market share, Saudi Arabia has had to draw on its oil sitting in storage. That led the sharp monthly gains in inventories to flip into a deficit late last year. From October 2015 to May 2016, Saudi crude inventories dropped 12 percent to 289 million barrels, according to The Wall Srteet Journal, the longest period of decline in 15 years.

But part of the reason that domestic demand is so strong is seasonal. Saudi Arabia’s oil consumption spikes in the summer because it uses a substantial volume of crude for electricity, and with all the air conditioners running full blast in the hot summer months, more oil is needed. In 2015, the country used 25 percent of its oil production domestically.

The Wall Street Journal says that Saudi Arabia is reluctant to simply ramp up production further in order to plug the deficit for fear of spooking the markets. An increase in output beyond 10.5 million barrels per day – a record set in June 2015 – could spark a sell off if oil traders interpreted the move as an attempt to flood the market. Moreover, although the country says it has a production capacity of 12.5 million barrels per day, it also values holding onto spare capacity in the case of a supply disruption. That means that it is already near its practical limit in terms of how far it is willing to ratchet up production.

By : Oilprice.com

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