Saudi Arabia appears to have been building crude oil inventories in lower domestic demand months in a scramble to offset the risks of “limited” effective spare production capacity, Goldman Sachs said on Wednesday.
In a note to clients, Goldman Sachs cited a crude oil inventory build of 35.4 million barrels in the period December-February, based on numbers from the Joint Organizations Data Initiative (JODI).
The reason the increased production was not pooled into exports, Goldman Sachs analysts argue, is grounded in an anticipation of “a substantial increase” in demand that cannot be covered by “simply raising production levels”.
The logic behind the build-up in stocks, which amount to 390,000 barrels per day (bpd) in that period, is not the possibility of shortages resulting from escalating tensions with Iran. Rather, it is primarily in preparation for the strains of peak domestic demandthat the summer heat brings to the Kingdom.
In the past, oil-fired power generation often took its toll on Saudi Arabia’s export volumes. The situation has become more pronounced than it has been due to what Goldman Sachs analysts describe as a market that has remained “very tight, despite the return of Libyan crude oil production”.
"This is consistent with our view that Saudi crude oil production is unlikely to be sustained over 10.5 million b/d in the near future,” the note said.
In November 2011, production reached the highest level in 30 years, hitting 10.047 million bpd. Since then, it has hovered just below the 10 million bpd mark, according to JODI.
Demand Won't Affect Exports: Saudi Officials
Officials of the world’s largest oil exporter have long maintained that total production capacity was 12.5 million bpd, and repeatedly dismissed suggestions of domestic demand affecting exports.
"Warnings last year about what would happen to Saudi oil exports if current levels of domestic usage were left unchecked were taken as fact. But we are not leaving domestic energy consumption unchecked,” Oil Minister Ali Al-Naimi told a conference earlier this year.
In its report on April 14, the International Energy Agency(IEA) forecast total Saudi consumption to see a “notable deceleration” this year, with direct crude burn forecast to decline by roughly 100,000 bpd from an average of 660,000 in the April-September peak period in 2011.
Ramped-up government spending, taking into account energy-intensive infrastructure such as desalination plants, are seen as supporting demand in a year where the IMF expects economic growth to reach six percent.
As part of the drive to safeguard oil export levels, national oil company Saudi Aramco announced earlier this week it had increased production capacity at Karan, its offshore natural-gas project ahead of schedule. The Kingdom sits on the fourth-largest gas reserves in the world.
But whether the ramp-up in gas production will be successful in sufficiently alleviating pressure off crude oil for power generation remains to be seen. Goldman Sachs analysts pointed out that “the implied direct crude burn has grown from 140 thousand b/d in 2003 to 520 thousand b/d in 2011 as Saudi natural gas production growth failed to keep pace with rising electricity demand”.
It also maintained its expectation that Brent crude oil prices will rise again in in the second half of this year, to average $120 per barrel, and reach $130 per barrel in 2013.
Yousef Gamal El-Din is CNBC's Middle East Correspondent and contributes to the channel’s flagship shows, as well as analysis for CNBC.com.
Stay in touch with him on Twitter at http://www.twitter.com/youseftv @youseftv