Published: Tue, July 03, 2018
Economy | By Melissa Porter

Saudi king agreed to raise oil output up to 2m barrels

Saudi king agreed to raise oil output up to 2m barrels

President Trump said Saturday that he persuaded the king of Saudi Arabia to increase oil production in an effort to lower gas prices in the U.S.

Vienna-based consultancy JBC Energy said the stronger the implementation and enforcement of USA sanctions, the higher the oil price will go.

The production output comes against the backdrop of renewed United States sanctions against Iran and growing turmoil in Venezuela, which could take 2 million bpd off the market.

Outside North America, oil prices have been rallying for most of 2018 due to record demand and voluntary supply cuts led by the Middle East dominated producer cartel of the Organization of the Petroleum Exporting Countries (OPEC). A request by Trump for 2m bpd more would be at least double market expectations. Estimates vary, but Saudi Arabia may have the ability to produce as much as 12.5 mb/d, although perhaps less.

"In response to the President's assessment of a deficit in the oil market, King Salman affirmed that the Kingdom maintains a two million barrel per day spare capacity, which it will prudently use if and when necessary to ensure market balance", the statement said.

It was not immediately clear what total level of Saudi production Trump was expecting or by when. Demand for oil has overtaken supply because of production shortages in Libya and Venezuela.

However, it is unclear how seriously to take Trump's claim of success. "While Saudi Arabia has the capacity in theory, it takes time and money to bring these barrels online, up to one year", said Amrita Sen of consultancy Energy Aspects.

Trump in May withdrew the United States from a 2015 agreement that curbed Tehran's nuclear capabilities and ordered the reimposition of US sanctions against Tehran.

Imports from Iran, which now is India's third largest supplier of oil after Iraq and Saudi Arabia, are likely to come down and will have to be replaced with more purchases from Saudi Arabia and Kuwait, they said, adding imports from Iran after November 4 will be possible only if Iran accepts alternates like rupee payments. Major buyers of Iranian oil, including Japan, India and South Korea, have indicated they may stop importing Iranian crude if United States sanctions are imposed.

European refiners, anxious about the U.S. sanctions on Iran which are set to be more severe than those imposed in 2012, are cutting their imports of Iranian oil.

"The Trump support base is probably the part of the US electorate that will be the most sensitive to an increase in USA gasoline prices", Halff said. Trump past year chose Saudi Arabia for his first foreign trip. "This was managed between the two to rob the pocket of rest of the world", he said.

Khalid Al Falih, Saudi Arabia's energy minister, stated that the new agreement implies an output increase of one million barrels per day, while other Opec members indicated an increase of 500,000 to 800,000 bpd.

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