Saudi Arabia wants a new equilibrium in the oil market

22 july 2016 | IA REGNUM

“The main explanation for the decline in Saudi oil exports even as the output of oil is growing is an increase in domestic demand: as a result of a very hot summer, the demand for electricity in Saudi Arabia is on the rise and more than half of the electricity generated in the country is produced by oil fired power plants,” said Analytical Center expert Irina Pominova in an interview with an IA REGNUM correspondent. According to the information of the International Economic Agency, in the first six months of this year Saudi oil production went up by 240,000 barrels a day (or by 2.4%). Compared to January last year the increase in output totaled 860,000 barrels a day (9.0%). Thus, the contribution of Saudi Arabia to global output increased, reaching 13% in June, the expert noted.

Irina Pominova
Irina Pominova
Department for Fuel and Energy Sector

Ms. Pominova believes that the decisions about how much oil to export are dictated not just by external factors but also by internal ones. Competition for markets to sell oil to remains high in the global market because of the low oil prices. One symptom of that is the fact that no quotas for oil production were agreed at the latest meeting of the Organization of the Petroleum Exporting Countries in June as well as the fact that total output by the cartel reached a new high since 2008. “At the same time Saudi Arabia is having to look for a new balance between propping up oil prices and holding back US shale oil producers,” Ms. Pominova stressed.

In order to support the oil sector and specifically oil exports, the Saudi authorities are taking a number of measures. These include far reaching plans to diversify the country’s economy outlined in the new development strategy and fleshed out in the National Economy Transformation Program through 2020, Ms. Pominova noted. “Development of nuclear power production and alternative energy sources in the country should cut the use of oil in the electric power industry. These plans call for oil output of 12.5 million barrels a day, which is close to what we saw in June, if production of condensate is taken into account,” she explained.

Against the backdrop of these factors, the short term development of the Saudi Arabia oil market and any further steps that the Saudi oil companies are going to be taking in this context are two topics of special interest. Ms. Pominova believes that the official position is to support the current high level of output. As far as foreign markets are concerned, the kingdom clearly intends to keep it cool and avoid any new shocks, an approach that the new Saudi oil minister Khalid al-Falih talked about earlier. “It is a fairly rational position, given the current conditions, but its practical implementation is going to depend on whether or not Saudi Arabia manages to find a new balance in the new global oil market,” Ms. Pominova summed up.