2015 - per the 10K, page-28

Saudi's dwindling spare capacity raises risk of oil price shock


As high cost production comes off line amid lower oil prices and the market starts to rebalance, the industry will have a limited capacity to increase production meaningfully if there is a sudden disruption.

This would leave the market vulnerable to a big price shock, says Oslo-based consultancy Rystad Energy.

The assumption is based on fresh estimates for Saudi Arabia's spare capacity — the volume of production that can be brought on by the Kingdom within 30 days and sustained for at least 90 days.

The spare crude production capacity of the world's largest crude exporter stands at only 1.1m barrels a day, according to Rystad data, writes Anjli Raval, oil and gas correspondent, in London.


Nadia Martin, senior analyst at Rystad Energy, said:

The oil market is at risk of price spikes despite the focus on oversupply. Current spare capacity is far lower than the 2.1m b/d of spare capacity the Kingdom held in 2009, when the oil market last demonstrated a significant misbalance in supply and demand.


A price spike could occur as early as February of next year.


Saudi Arabia has traditionally functioned as the world's safety cushion to help rebalance the market during sudden disruptions in global production.

Rystad pointed out in 2012 Saudi Arabia increased crude exports to alleviate market tightness resulting from the US embargo against Iran and as EU sanctions were introduced, while Libyan exports fell during the Arab Spring.

Rystad estimates that Saudi Arabia's spare capacity had fallen to 0.1m b/d in 2012.

The Kingdom was slow to rebuild spare capacity thereafter, increasing levels to 0.4m b/d in 2013 and 0.8m b/d in 2014.

But Rystad argues for the spare capacity of 1.1m b/d is at an historic low for any oversupplied market.

Why?

In November, Saudi Arabia led the Opec decision not to cut production to bolster prices that had been falling precipitously since June 2014, as it pursued a strategy for long term market share over short term crude revenues.

This has partly driven production to record highs this year, with Saudi Arabia pumping more than 10m b/d for much of this year. This inevitably reduces its additional spare capacity.

Oil analysts said the Kingdom in November abandoned its role as a swing producer, at least in an oversupplied market, as the Gulf nation felt it was only hurting its long term interests by cutting production.

Others have said it is no longer able to act as a swing producer at all, because of its limited ability to boost production. The title of swing producer they say, has been handed over to US shale producers.


Ms Martin said that in the event of a major price spike:

The US is the remaining producer who can meaningfully increase output in the near-term. Russia has limited capabilities.
Even so, the US will not be able to respond in the same way. At this stage it is unable to export crude and would need to coordinate between companies. If anything this is a case for lifting the export ban.


http://www.ft.com/fastft/396071/oil-market-vulnerable-big-price-shock