Surprise Saudi decline depresses Opec output

Market: Crude oil
03/08/18

Expectations that Saudi Arabia would boost output to record levels were confounded as production slipped by 200,000 b/d

Opec production edged down in July on an unexpected drop in Saudi output. Production eased by 50,000 b/d to 32.23mn b/d.

An expected production increase by Saudi Arabia to an unprecedented 10.8mn b/d in July failed to materialise after buyers reportedly turned down offers of additional supplies for July. Instead, Saudi Arabia's output declined by 200,000 b/d to 10.29mn b/d. Riyadh had been expected to lead efforts to reduce overcompliance with production cuts by increasing its output last month — particularly after US president Donald Trump harangued Opec over rising oil prices. But there was limited interest in the extra July cargoes.

"Saudi Arabia only exports barrels that are earmarked to match confirmed lifting requests by end-users, and does not try to push oil into the market beyond its customers' needs," the country's Opec governor Adeeb al-Aama says.

Saudi crude exports were down by an even sharper 250,000 b/d in July, preliminary data indicate, in part because of increased direct crude burning at power plants to meet peak air-conditioning demand. Saudi Arabia offered additional Arab Extra Light to its term customers in Asia-Pacific but demand is thought to have been lacklustre. Supplies of lighter crude have been plentiful in the region amid surging imports of US crude and condensates.

Extra supplies of Saudi Arab Heavy and Medium are likely to have been a more suitable substitute for refiners facing declining Venezuelan production. Venezuela's output fell to 1.3mn b/d in July, which is 600,000 b/d lower than a year earlier. An exodus of skilled workers from oil firm PdV and operational problems at the country's Orinoco upgraders combined to undermine supply.

Higher production from Mideast Gulf producers Kuwait and the UAE and west African suppliers Angola and Nigeria failed to wholly offset the Saudi decline. Kuwait and the UAE boosted production by 90,000 b/d and 50,000 b/d to 2.8mn b/d and 2.95mn b/d, respectively.

Nigerian production rebounded as flows at key terminals resumed. Shell lifted force majeure on Bonny Light exports on 13 July, after a two-month shutdown of the Nembe Creek Trunkline. Forcados exports resumed after a pipeline shutdown because of a leak. Angolan production also increased and will climb further following the start-up of Total's 230,000 b/d deepwater Kaombo project in late July. Production at the field has begun at a rate of 115,000 b/d and will increase to 230,000 b/d next year. First exports of the project's new Gindungo grade are scheduled for September.

Iranian fall

Iranian production fell marginally, mainly because of water supply problems at the 375,000 b/d Isfahan refinery. Crude exports were largely unchanged despite the looming threat of US sanctions, which take effect in November. But buyers of Iranian crude are starting to pare back their purchases in the hope of securing US sanctions waivers. South Korean importers SK, Hyundai and Hanwha Total halted their imports of Iranian crude and condensate last month.

Libyan production fell to a 15-month low, undermined by factional struggles for control of port infrastructure and field assets. Output gradually recovered from a low of 525,000 b/d to 870,000 b/d by the end of the month following a formal resolution to the crisis on 11 July. The El Sharara field went off stream briefly following a kidnapping before resuming flows.

The next meeting of the Joint Ministerial Monitoring Committee that records compliance with the Opec and non-Opec production deal agreed in late 2016 will take place in Algeria on 22-23 September.

Opec wellhead production					mn b/d
	Jul	Jun	Agreed cut*	Actual cut*	Compliance (%)

Saudi Arabia	10.29	10.49	0.49	0.28	57
Iran†	3.73	3.78	-0.09	0.25	139
Iraq	4.51	4.49	0.21	0.06	29
Kuwait	2.80	2.71	0.13	0.05	37
UAE	2.95	2.90	0.14	0.12	85
Qatar	0.60	0.60	0.03	0.05	150
Algeria	1.06	1.03	0.05	0.03	62
Libya‡	0.66	0.74	na	na	na
Nigeria‡	1.74	1.68	na	na	na
Angola	1.46	1.38	0.08	0.23	285
Congo (Brazzaville)	0.32	0.32	na	na	na
Gabon	0.17	0.17	0.01	0.03	367
Equatorial Guinea	0.12	0.12	0.01	0.02	175
Venezuela	1.30	1.35	0.10	0.77	813
Ecuador	0.52	0.52	0.03	0.02	77
Opec	32.23	32.28	1.18	1.56	132
*from Oct 2016 baseline in Opec Monthly Oil Market Report, except for Iran from Jul 2005, and Angola from Sep 2016
†Iranian compliance measured relative to cut from 2005 baseline
‡Libya and Nigeria exempt from production agreement

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