Hot summer complicates Saudi Arabia's oil balancing act

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Hot summer complicates Saudi Arabia's oil balancing act

 

Saudi Arabia to hold production steady in May, June

Crude burn set to increase to 491,000 b/d in July, on A/C use

Iraq, Kuwait also will consume more crude for power generation

 

 

Saudi Arabia's seasonal spike in domestic oil consumption to fuel power plants comes at an inconvenient time for the OPEC kingpin, which is under increasing US pressure to keep the lid on prices but also wants to rein in production to drain global inventories. Diversifying the sources of its electricity generation would be an easy way to gain even more clout in the oil market.

 

The kingdom is the largest user of crude oil in the Middle East for generating electricity, potentially reducing its spare capacity during the summer when demand for air conditioning and seawater desalination peaks. The region's largest economy consumed 363,000 b/d of oil for industrial use and power generation in April, but the figure is set to rise to 491,000 b/d in July, according to S&P Global Platts Analytics forecasts.

This spike in domestic demand coincides with Riyadh's pledge to US President Donald Trump to keep oil markets stable despite the loss of Iranian barrels and numerous other geopolitical risks, highlighted by last week's attacks on shipping and infrastructure in the region. Saudi Arabia is poised to hold its production down to 9.7 million and 9.8 million b/d for May and June respectively. It may also reduce the amount of oil that domestic Saudi refineries will be able to process.

Saudi energy minister Khalid al-Falih, who announced the production figures Sunday at an OPEC/non-OPEC monitoring committee meeting, said the kingdom's crude exports would be held below 7 million b/d this month and next.

"The numbers I quoted include the incremental higher demand that will take place," Al-Falih said. "That is a level that ensures global crude oil inventories keep going down."

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The minister added that the kingdom would not produce above its quota under the OPEC/non-OPEC supply accord of 10.31 million b/d in July, as he would prefer to see the coalition's production cuts extended past their June expiry.

However, crude consumption in Saudi Arabia and other Arab states in the Persian Gulf has been falling following a drive to reform power sectors by cutting consumer subsidies, encouraging more energy efficiency and investing in projects to shift more generation capacity to gas, renewables, or even nuclear. It is hoped these policies will free up more oil for export and strengthen the region's spare capacity buffers.

"This is a beginning of a long-term process, but the kingdom has been active in developing more gas resources," said Falih, who oversees energy policy in a country with the world's fifth largest gas reserves. "Our crude burn has started to decline over time."

Marine fuel sulfur regulations that go into effect in 2020 will likely boost the use of fuel oil in the electricity sector next year. Platts Analytics forecasts that Saudi Arabia's 2020 peak level domestic crude burn will fall to 433,000 b/d next July.

SWITCHING FEEDSTOCK

Neighboring Iraq and Kuwait also face expected rises in domestic crude consumption to meet summer air conditioning demand, but on a smaller scale.

Baghdad, which flares much of its associated gas production, used 89,000 b/d of crude for electricity generation in 2018, according to Platts Analytics.

However, that is down from 158,000 b/d in 2017, as Iraq has been ramping up its fuel oil usage and also importing gas and electricity from Iran. However, importing supplies from Tehran could be complicated by US sanctions on the Iranian energy sector going forward.

Iraqi oil minister Thamer al-Ghadban said Sunday at the OPEC/non-OPEC monitoring committee meeting that his country was currently consuming about 70,000 b/d for electricity. If US sanctions eventually cut off Iraqi supplies of Iranian electricity and gas, he said some of the gas-fired power plants may have to switch to burning crude, gasoil or fuel oil.

Iran provides gas to feed nearly 20% of Iraq's total gas-fired generation capacity, but the sanctions waiver Iraq received from the US to continue purchasing it expires in June.

"We have ample gas, we have ample fuel oil," Ghadban said. "We have stored quite a sizable stock of gasoil."

Any increase in crude burn without a reduction in refinery runs or exports would lower Iraq's already spotty compliance record with its production quota of 4.51 million b/d under the OPEC/non-OPEC agreement. Iraq has said it produced 4.50 million b/d in April, though the independent secondary sources OPEC uses to track output have pegged the April figure at 4.63 million b/d.

Kuwait, meanwhile, expects to burn about 40,000 to 50,000 b/d of crude in power plants this summer, a ministry official told S&P Global Platts.

Platts Analytics estimates Kuwait's crude burn at 42,000 b/d for the full year 2019, falling to 20,000 b/d in 2020, as the country shifts towards using more natural gas and fuel oil.

Kuwait pumped 2.70 million b/d in April, according to OPEC's secondary sources, below its quota of 2.72 million b/d.