RIYADH, March 25: Wittingly or unwittingly, markets are witnessing the emergence of a new ‘swing producer’ on the global energy map. And this is not Saudi Arabia, the swing producer of the yester years. Rather it is Iraq. With global spare capacity, resting basically in the hands of Riyadh, markets are experiencing new roles, for some producers, that was not anticipated even a couple of years back while America overtook Baghdad.
The Saudi output then, as per this policy and discarded by Riyadh since for long now, was based on actual market requirements, just enough to keep the markets balanced. A special effort was thus made by Riyadh then not to make the global markets oversupplied. The objective was two fold — to keep the global crude markets firm from a price view point and secondly to produce this precious commodity, which has ultimate limits on supplies, only as much as is absolutely required. A conscious effort was thus made to keep the bounties of this god gifted commodity available to the next generations too.
Saudi Arabia had thoughtfully carved for itself, as a policy instrument, the role of a ‘swing producer’ in the global crude markets. The role generated heated debate then, both at domestic levels as well as in far-flung lands. Firm positions were taken up by the sides, the protagonists as well as the antagonists. Some today say perhaps with some hindsight, that the debate ultimately led to some major changes in Riyadh, both in person and in policy. Heads rolled, some emphasise.
As new blood was inducted to have a fresher look at some of the aspects of the long-term impacts of the policy of being the world’s sole ‘swing producer’, a new approach was adopted to this entire issue. Market share became the buzz word among the Saudi energy managers, and perhaps rightly so. With its growing financial needs, Saudi Arabia needed money and thus could not have afforded an eroding market share of its virtual single product economy then.
What was followed is now history. Crude prices experienced turbulence of the highest order -– almost on a roller coaster ride — yet Riyadh, the Opec kingpin, remained glued to the idea of holding on to its market share. After all, the kingdom owed its current affluence to oil riches. It needed markets to make money and meet its growing financial obligations and expectations of a booming generation. Increasing capacity and hence its market share was perhaps the only way to sustain its growing economy.
Thus despite some analysts still talking in terms of Saudi Arabia adopting for itself, rather stealthily now, the role of a swing producer so as to balance the markets — if absolutely required — the kingdom now publicly professes of discarding for itself the self-carved role of a swing producer. Riyadh simply can’t afford to do that, analysts here in Dhahran, the virtual global energy capital, concede.
History now appears to be repeating now, though in a different mould. “Iraq seems to be the new swing producer in Opec,” says John Kingston, global director of oil at Platts. “While Iraq’s geological upside is enormous, the infrastructure of the industry remains threadbare, and it is obviously an easy target of insurgency. At this point, it’s difficult to imagine a jump of several hundred thousand barrels per day of output, but it’s not that difficult to imagine a decline of that magnitude,” Mr Kingston argues.
And he had reasons for that. A recovery in Iraqi volumes boosted Opec production by 240,000 barrels per day (bpd) to 29.92 million bpd in February from 29.68 million in January this year, a Platts survey of Opec and oil industry officials showed earlier this month.
The biggest single increase in the total Opec production for the month was boosted by Iraq, whose overall supply rose to 1.79 million bpd from 1.53 million bpd in January. And the role of Baghdad, as the new, emerging swing producer, becomes all the more apparent, when one views it from the angle that excluding Iraq, the total output from the remaining 10 Opec members dipped by 20,000 bpd to 28.13 million bpd over the month. This was despite production increments, though much smaller in quantum when compared to the boost from Iraq, from three other countries. These included Libya, Saudi Arabia and the UAE having contributed of this reported rise in production in February over January.
The latest estimates show that the Opec–10 today is producing just 130,000 bpd in excess of their current output ceiling of 28 million bpd, rolled over in its last ministerial moot in Vienna. A glance at the individual production levels of the Opec-10 is hence sufficient to generate some concerns in some quarters. While several members such as Saudi Arabia, Kuwait and the UAE are producing comfortably above the assigned quotas, Iran, Venezuela and Indonesia seem to be finding it hard to meet their production output quotas and are producing below that level.