Abu Dhabi, UAEThursday 2 July 2020

Saudi Aramco and Adnoc to raise oil supply in April

Aramco is expected to increase output capacity to 13 million bpd while Adnoc said it will accelerate its planned 5m bpd capacity target

The coronavirus pandemic did not impact its operations or its supply chains, Aramco said last week.​​​​​​ EPA
The coronavirus pandemic did not impact its operations or its supply chains, Aramco said last week.​​​​​​ EPA

Saudi Arabia, the world's largest oil exporter, will increase its production capacity by 8.3 per cent to 13 million barrels per day following the collapse of the Opec+ alliance, led by the kingdom and Russia. The UAE has also announced it will raise its crude supply to more than 4m bpd starting next month.

"Saudi Aramco announces that it received a directive from the Ministry of Energy to increase its maximum sustainable capacity from 12m bpd to 13m bpd," the company said in a regulatory filing on Wednesday to the Tadawul exchange, where its shares trade.

Amin Nasser, president, and chief executive of Aramco, said "the company is exerting its maximum efforts to implement this directive as soon as possible", according to a statement carried by the Saudi Press Agency.

However, the kingdom did not specify when it would achieve capacity of 13m bpd.

The company on Tuesday said it would increase crude supply in the market by nearly 2.6m bpd to 12.3m bpd for April.

Oil prices, which gained some ground in early trading, declined following news of fresh supply hitting the market next month. Brent, the most widely-traded benchmark, declined 3.71 per cent following the announcements and was trading at $35.84 per barrel at 4.33pm UAE time, while West Texas Intermediate fell 3.55 per cent to $33.14 per barrel.

US stocks tumbled in morning trading on Wednesday, even as the Bank of England cut interest rates and policymakers across Europe shifted gears to offset the impact of the coronavirus on their economies.

The S&P 500 was down 2.9 per cent at the start of trading, while the Nasdaq Composite fell 2.6 per cent and the Dow Jones Industrial Average slipped 3 per cent. The yield on the benchmark 10-year US Treasury dropped 5.2 basis points to 0.7 per cent.

Meanwhile, the Abu Dhabi National Oil Company also followed Saudi Aramco's supply increase by announcing it would bring 4m bpd to the markets in April.

"In addition, we will accelerate our planned 5m bpd capacity target," the company's chief executive and UAE minister of state Dr Sultan Al Jaber said in a statement.

"Adnoc will shortly announce forward prices for the months of March and April 2020. This decision has been made to ensure that our customers have visibility of the price so they can plan accordingly," Dr Al Jaber said.

The UAE, Opec's third-largest producer, had output averaging 3.04m bpd for the month of February in compliance with the Opec+ pact.

The country's energy minister Suhail Al Mazroueireaffirmed his faith in the viability of the Opec+ pact in ensuring market stability on Wednesday following the country's plans to increase production.

"A new agreement is essential to support a balanced and less volatile market," he said in a statement on Twitter.

Saudi Arabia could choose to expand production capacity at its legacy and giant superfields, particularly Zuluf and Safaniyah, which have been marked out for further expansion and could underpin an increase in maximum sustainable capacity, said Ian Thom, Middle East upstream principal analyst, at consultancy Wood Mackenzie.

However, the increase of production capacity by 1m bpd could take "several years", he added.

"Adding 1m bpd of additional oil production capacity could take four-to-five years. Mega-projects are likely to form a large part of the upgrade. A smaller upgrade or expansion (i.e. 100,000 bpd brownfield development) may have a slightly shorter time-frame, but perhaps still three to four years with some shared infrastructure already in place," he added.

Saudi Arabia last month started production on the Neutral Zone fields it shares with fellow Opec producer Kuwait, bringing an end to a longstanding dispute. The onshore Wafra and offshore Khafji fields were expected to begin production by the end of last month, with the full capacity of 500,000 bpd expected to be achieved by year-end.

Output for April - 12.3m bpd - would be the highest Saudi Aramco has supplied to markets, noted Ehsan Khoman, head of Mena research and strategy at Japanese bank MUFG.

Saudi Aramco's largest historical output was in October 2018, when it raised production to 10.7m bpd when Opec+ brought more supply to support the loss of barrels due to US sanctions against Iran.

With current output capacity at 12m bpd, Saudi Arabia is expected to draw on 300,000 bpd of inventories "in Okinawa, in Egypt, and also in Rotterdam in the Netherlands" to meet its targets, said Mr Khoman.

The kingdom's decision to supply more crude to the market also prompted former Opec+ ally Russia to say it could raise production by 500,000 bpd "in the near future", according to energy minister Alexander Novak on Tuesday.

Moscow said it remains open to further talks with Opec, which failed to persuade the world's second-largest producer to action additional cuts of 1.5m bpd in Vienna last Friday. The alliance, formed in 2016, has been drawing back 1.7 million bpd from oil markets since January but the pact is set to expire in March.

Following the failed talks between Saudi Arabia and Russia, Riyadh issued guidance to the market on Sunday that it will reduce its sale price to Asia by $4 to $6 per barrel, much higher than the cut of $2 per barrel expected by analysts prior to the Opec meeting last week.

An influx of Saudi supply would come amid the first full-year decline in oil demand in more than a decade, according to the International Energy Agency.

IEA executive director, Fatih Birol, said producers are "playing Russian roulette with the oil market" with possible "grave consequences".

Updated: March 11, 2020 07:43 PM

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