What a Saudi oil freeze would really mean for markets

Bloomberg

Saudi Arabia shot down rumours it might cut oil production, but reaffirmed its commitment to an output freeze that could
restrict crude flows to market this summer. With the world’s biggest exporter
already pumping near-record volumes, that may not matter.
Last week’s pledge to cap production at January levels along with Russia, Venezuela and Qatar — repeated on Tuesday in Houston by Saudi Oil Minister Ali al-Naimi — could mean the Middle Eastern nation refrains from the typical output boost needed to feed the summer increase in domestic demand. Forgoing that surge would, in theory, deprive the market of exports equivalent to about a quarter of the current global crude surplus.
“Come summer, the production freeze will amount to a cut in Saudi crude exports,” said Olivier Jakob, managing director of consultant Petromatrix GmbH in Zug, Switzerland. “By holding supply at January levels and not increasing when their domestic requirement for power generation is at its peak, there will be about 500,000 barrels a day less Saudi crude making its way to global markets.”
Saudi Arabia has on average boosted output by about 360,000 barrels a day from January levels to the seasonal peak in June and July, according to figures going back to 2002 from the Riyadh-based Joint Organisations Data Initiative. Over the same period, the amount of crude the country burns to generate electricity typically rises by as much as 500,000 barrels a day as citizens turn up their air conditioning, the data show.

SEASONAL PATTERN
“The market is still assuming a big summer swing up” in Saudi production this year, said Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd. in London. “The freeze is making people think Saudi exports may now have to be down over the summer.” With Saudi Arabia’s production already at near-record levels, a dip in exports wouldn’t leave the market short.
The biggest member of the Organization of Petroleum Exporting Countries ramped output up last year to intensify pressure on U.S. shale producers and mark its territory before Iran’s return to world markets. It was pumping 10.2 million barrels a day in January, according
to data compiled by Bloomberg — a
level that already exceeds the summer production peak in all but one of the
past 10 years.
The exception was 2015, when peak summer output reached a record 10.6 million barrels a day, 400,000 higher than last month’s level, according to data compiled by Bloomberg. The International Energy Agency projects the second-quarter supply surplus will be about 1.5 million barrels a day.
This year, “the kingdom would not necessarily have to sacrifice crude exports to meet seasonal demand,” according to Sen. It has large amounts of oil in storage plus natural gas from the new Wasit project that could feed power generation, she said. “If alternatives can fill the gap in the summer, the dip in Saudi summer exports will not be that significant.”