Eric Watkins
Oil Diplomacy Editor
Saudi Arabia's ability to produce the oil needed to keep markets calm has come under scrutiny lately, a point neatly confirmed by recent analyst reports.
"As revolution and political transition transform the Middle East and North Africa (MENA) region, markets have become increasingly focused on developments in Saudi Arabia," said a report by Nomura Securities.
Traders are searching for any potential threats to Saudi Arabia's oil production capacity—particularly given its use in making up for shortfalls elsewhere—and monitoring its evolving role in regional economic and political trends.
That view was underscored by another report from a team of Raymond James writers, normally a fairly cool-headed group.
"Let's first state the obvious: supply concerns out of [MENA] have been driving oil prices in 2011," the Raymond James team writes, adding, "Unfortunately, we (and most people) simply don't know how the regional tensions will evolve."
Riyadh's awareness
Riyadh is highly aware of the uncertainty—even anxiety, perhaps—behind rising oil prices, and it has gone on the offensive in recent weeks, aiming to dampen the growing crescendo coming from the world's traders.
Last week, an unnamed senior Persian Gulf source said the Saudis would have "no problems" producing at its claimed 12.5 million b/d capacity if the market needed the oil.
In fact, the official dismissed doubts raised by some analysts over the Kingdom's stated spare capacity as the work of speculators trying to manipulate oil prices after fighting in Libya has disrupted production there.
"First traders used the peak oil theory to drive the market up and since that didn't work now they are saying that Saudi Arabia can't use its full capacity, which is completely not true," the source said.
"The market is reacting to misinformation, there is no reason for the price to be at this level," the source said, adding, "We have no problems in reaching our full capacity, we are completely capable of it if it's required."
Negative speculation
The source even commented directly on another analyst report about Saudi Aramco's alleged plans to boost the number of rigs drilling wells in the Kingdom—a report that inspired negative speculation about Saudi Arabia's production capacity.
"The rigs are for maintaining capacity and other activities like gas exploration, but it's not at all a sign that we can't produce 12.5 million b/d," the source said.
Traders have their concerns, producers have theirs. Maybe it really just comes down to who you trust.
Given the remarkable 80-year performance of the oil company formerly called the California-Arabian Standard Oil Co., though, this editor would put his money on Riyadh.
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