Domestic Demand to Corner Saudi Oil Exports: Experts

As Saudi Arabia continues to grow rapidly, the dilemma of sufficiently meeting domestic and international crude oil demand becomes one that would lend credence to believers in higher prices down the line, experts and analysts told CNBC.

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Yousef Gamal El-Din, CNBC

In the production estimates for June, several officials have been quoted in a range of 9.2-9.8 million bpd, with the International Energy Agency (IEA) seeing the number at 9.7 million bpd. Only data for May is available thus far from OPEC and the Joint Organization Data Initiative (JODI), both just a notch below the 9 million bpd mark.

But how many of these barrels were actually exported? Most estimates from various sources come in a range of 7.5-7.9 million bpd in June. Using its latest data for May, JODI points out that domestic demand was up 11 percent year-on-year, averaging almost 2 million bpd in 2011. Summers are hard for the Gulf, with energy consumption reaching peaks as countries try to keep cool.

But strong economic growth, projected by the International Monetary Fund (IMF) to reach 6.5 percent in 2011 off the back of higher oil prices as of late, and a growing population mean that more is needed, analysts said.

“Power generation will play a significant part in the demand growth story, with gas supplies unable to keep up, and industrial projects in sectors such as aluminum and petrochemicals competing fiercely for any gas that is available”, Khodor Mattar, Head of Energy, MENA at Rothschild, told CNBC.

The massive $16 billion Manifa oil field development, led by heavyweight Saudi Aramco, is expected to come online starting with 500,000 bbl/d of heavy, sour crude in 2013 (ultimately accelerating to 900,000 bbl/d within two years), and can provide some relief.

The recent bid by authorities to explore nuclear power options may point to the realization of how soon supplies could be precariously stretched. It’s evidently more than just as a tit-for-tat move with Iran to avert shifts in the regional balance of power. Renewable energy meanwhile is unlikely to have a substantial impact on hydrocarbon demand in the near-term.

Mattar does not believe in any near-term comeback to Libya’s original production levels, a prospect that only piles the pressure on the world’s largest crude exporter. The market is expected to be tight for a while, he adds, especially given that Saudi Arabia’s spare capacity “has been eroded”.

As the market had expected, the IEA decided against a second release of its strategic oil reserves. The reason is that stocks were still entering the market and that the “tightness in prompt supply for light sweet crudes has diminished”.

The statement clarified that “the IEA stands ready to augment the Libya Collective Action if market conditions again warrant”.

But the road ahead is unclear, as a report by Jadwa Investment warned that high government spending, rising domestic consumption and limited crude production increases would drag the Saudi government into budget deficits as soon 2014.

Total oil production was not expected to rise above 11.5 million bpd by 2030, of which 6.5 million bpd would be used by the country itself.