Abu Dhabi, UAEWednesday 22 January 2020

Saudi Arabia and Kuwait agree to restart oil production in neutral zone

Agreement could bring 500,000 barrels per day of crude supply back into the global oil market

The Gulf nations of Kuwait and Saudi Arabia have signed a preliminary agreement on dividing up oil production in the neutral zone that sits between the two countries, a move that analysts say could eventually bring a further 500,000 barrels of oil per day into the market.

The two governments formally signed the pact, the official Kuwait News Agency confirmed on Tuesday, without giving further details of the agreement.

"I congratulate his highness the Emir Sheikh Sabah al-Ahmad al-Sabah … on the occasion of signing the memorandum of understanding with our brothers in the kingdom of Saudi Arabia and the return of production to the divided zone," minister Khaled Al-Fadhel said in a statement carried by Reuters.

Two major oilfields in the neutral zone between Saudi Arabia and Kuwait, the onshore Wafra field and the offshore Khafji, have ceased production since 2014 and 2015, respectively, meaning "it will likely take some time [months and not days] to increase production", Giovanni Staunovo, a commodities analyst at UBS explained.

Crude pumped from the zone by the two countries stood at about 300,000 bpd before production was halted.

"However, total production capacity is said to be around 500,000 bpd," Ehsan Ul-Haq, an oil markets analyst with financial data company Refinitiv told The National.

The type of oil produced in the zone is a heavy sour crude, which has complex refining needs and is, therefore, sold at a discount to other crude products in the region, such as the Dubai oil benchmark, he noted. In the short term, there is not likely to be a major impact on additional supply from the zone entering into the market, he said.

"The addition of 100,000-200,000 barrels of heavy sour will not be felt in the beginning but once it starts moving towards 300,000 bpd, it might pose a problem for Opec+," he said, referring to the group of Opec and non-Opec crude producers led by Russia that has been cutting production since 2017 in a bid to support pricing.

The group, earlier this month, agreed to deepen cuts to 2.1 million barrels per day until March next year, although comments from Russian energy minister Alexander Novak on Monday that cuts would remain in place "until the market requires it", helped to support oil prices during pre-Christmas trading.

Brent crude, the most widely-traded benchmark, was up 28 cents, or 0.42 per cent, at $66.67 per barrel at 3.45pm UAE time on Tuesday. West Texas Intermediate was up 16 cents at $60.68 per barrel.

"Due to the Opec+ production cut deal, any increase in the neutral zone will most likely be compensated by lower oil production in other fields in both countries; i.e. both countries will not produce more oil," Mr Staunovo said. "That said, the oilfields in the neutral zone will increase Opec's spare capacity further. Higher spare capacity tends to cap the upside of oil prices."

A tanker removing industrial waste from the remote Wafra area, where one of two oil fields in a neutral zone between Kuwait and Saudi Arabia are set to reopen. Gustavo Ferrari / The National.
A tanker removing industrial waste from the remote Wafra area, where one of two oil fields in a neutral zone between Kuwait and Saudi Arabia are set to reopen. Gustavo Ferrari / The National.

In the long term, oil prices will depend not only on the supply-demand balance maintained by Opec+ but also by US output, Mr Ul-Haq said, adding demand could be supported next year if China and the US reach an agreement on trade.

"Most analysts are expecting demand growth of around 1 million bpd in 2020, which is below normal," he said.

As a result, he added, most analysts are expecting "relatively stable" oil prices next year of between $60 and $70 per barrel.

Updated: December 25, 2019 02:37 PM

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