Higher costs forced Saudis to accept oil cut

Dubai/London: Saudi Arabia has long said it could produce as much as 12 million barrels per day (bpd) of oil if needed, but that pump-at-will claim — which would require huge capital spending to access spare capacity — has never been tested. Sources say the kingdom may have stretched its current limits by extracting a record of around 10.7 million bpd this year, which could be one reason why Riyadh pushed so hard for a global deal to cut productions.

Riyadh, the world's top oil exporter, felt the burn of cheap oil this year when crude was trading below $50 a barrel, as the reality of its costly war in Yemen and the task of shaking up its economy to create thousands of jobs began to sink in. With tight resources, Saudi Arabia found itself weighing the prospect of investing billions of dollars to raise oil output further if it wanted to gain more market share under a strategy adopted in 2014.

Instead, cutting production amid a global glut and low prices to take the pressure off its oilfields, secure better reservoir management and save itself unnecessary expenses, seemed the perfect deal. “You invest in raising your production when prices are high, not when they are low,” a Saudi-based industry source said. “Choices are tougher now. The question is, would the Saudi government with its tight budget put huge investment in raising production or put it somewhere else where it's needed more?”

Oil rose as much as 6.5 per cent on Monday to an 18-month high after Opec and some of its rivals reached their first deal since 2001 to reduce output jointly. On Thursday, oil LCOc1 was trading above $54 a barrel. Under the deal, Saudi Arabia, de facto leader of the Opec, will from January cut output to around 10 million bpd - well below the 12 million bpd that the state has affirmed it can produce.

Saudi-based industry sources and market insiders say the kingdom cannot sustain historically high output for long. State oil giant Saudi Aramco has never tested 12 million bpd and would find it hard to keep the needed investments flowing with current low oil prices, they said.