OPEC’s Best Kept Secret Will Soon Be Revealed

[Mark Sloan + 9]

Russia’s invasion of Ukraine has sent oil prices soaring and could soon deprive oil markets of more than four million barrels of Russian oil. For decades, OPEC has been looked to in times of crisis to stabilize oil markets, and in the coming weeks it is likely the cartel will be called upon again. While it is widely believed that Saudi Arabia and the UAE have some spare capacity, OPEC’s real spare capacity has remained the cartel’s best-kept secret.

https://oilprice.com/Energy/Energy-General/OPECs-Best-Kept-Secret-Will-Soon-Be-Revealed.html 

 

[Jeffrey Brown + 208]

It looks like we might finally find out once and for all if Saudi Arabia can actually exceed their 2005 net export rate of 8.7 million bpd on a sustained basis (total petroleum liquids, BP data base as of June, 2021). 

 

Note that as annual Brent crude oil prices approximately doubled from $25 in 2002 to $55 in 2005, Saudi net oil exports increased from  6.4 to 8.7 million bpd.  

 

As annual Brent Crude oil prices doubled again, from $55 in 2005 to an average of $110 over a three-year period from 2011 to 2013, Saudi net oil exports declined from 8.7 million bpd in 2005 to an average of 7.5 million bod for 2011 to 2013.  They were at 8.3 million bpd in 2019 (because of the pandemic effects, I'm largely ignoring the 2020 data for now).   

 

However, the real story is what is hidden, to-wit, the ongoing rate of depletion in the post-2005 supply of Saudi CNE (Cumulative Net Exports of oil).  

 

I have compared Saudi Arabia, 2005 to 2012, to what I call the Six-Country Case History, i.e., six net oil exporters that hit or approach zero net oil exports from 1995 to 2002 (see attached chart).  

 

The only number that analysts seem to pay attention to is the top line production number, and from 1995 to 1999, the Six Countries' combined production increased, but in that time period, they had already shipped more than half of their post-1995 CNE.  

 

My premise is that Saudi Arabia, post-2005, is analogous to the Six Countries, 1995 to 1999, i.e., rising production, but falling net exports, because of rising domestic consumption--with hidden, but enormous, rates of depletion in their remaining supplies of Cumulative Net Exports of oil. 

 

Saudi Arabia's rate of decline in what I call the Export Capacity Index Ratio or ECI Ratio (ratio of production to consumption) has slowed in recent years, but if we extrapolate the 2005 to 2019 rate of decline in their ECI Ratio (which basically assumes no decline in production for the indefinite future), an optimistic estimate is that Saudi Arabia has already shipped about half of their total supply of post-2005 Cumulative Net Exports of oil. 

 

Note that although the estimates of remaining CNE can vary with time, the actual CNE depletion metric is always a one-way street, i.e., the supply of remaining Saudi post-2005 CNE is by definition always declining year by year; it's just a question of at what rate?   And the CNE depletion rate tends to accelerate with time.   

 

For example, the Six Countries shipped 14% of Post-1995 CNE in 1996, and in 1999 they shipped 22% of remaining Post-1995 CNE--even as production in 1999 was higher than 1995. 

 

A simple analogy would someone with a million dollars in the bank, maintaining his lifestyle by withdrawing $100,000 per year.  In year one, he withdraws $100,000, 10% of the balance.  In year six, he withdraws his usual $100,000---and on the surface everything seems fine--but in year six he withdrew 20% of the remaining balance, i.e., an accelerating rate of depletion in the remaining bank balance, even as he maintained his lifestyle with his usual $100,000 withdrawal.  

 

I think that is basically what is happening in the net oil importing countries like the US, i.e. we are maintaining our lifestyle via an accelerating rate of depletion in the remaining supply of post-2005 Global Cumulative Net Exports of oil.  

 

Note that while the US was technically a net oil exporter on a total liquids basis in 2021, we still had significant net crude oil imports, ranging from 2.2 million bpd to 4.2 million bpd, on a four week running average basis.  This corresponded to about 15% to 27% of crude oil inputs into US refineries in 2021.  In January of this year, we had net crude oil imports of about 4 million bpd, corresponding to 26% of crude inputs into US refineries.