EFG-Hermes MENA Economics Note – Saudi Arabia: Record Oil Production in December

• Record Saudi Oil Production in December 2011
Saudi oil production rose to 10 million barrels per day (bpd) in December 2011, according to EIA-released data. This was the highest level in three decades and lifted average 2011 oil production to 9.4 million bpd. The increase came despite a further rise in Libyan oil output in December. We see the higher Saudi oil output as being aimed at stabilising the oil market given rising tension between Iran and the West, and supply concerns from Nigeria.

• Countries Looking to Saudi to Diversify Oil Source from Iran
We believe the geopolitical tensions and US sanctions against Iran could result in Saudi oil production remaining elevated, given that Saudi has the most meaningful oil production spare capacity globally. The US tightened sanctions against the Central Bank of Iran – which clears most of Iran’s crude exports – on 31 December.  Moreover, the European Union (EU) is discussing the option of banning Iran’s crude oil imports with a possible decision by end-January. Asian oil importers are looking to diversify some of their oil imports away from Iran, although we expect any moves to be gradual. India and Japan have asked Saudi to increase oil export levels for January. There are signs that Asian and European spot crude oil purchases from Tehran have also fallen after the US announced sanctions against Iran’s Central Bank.

• Our 2012 Oil Production Assumption Looks Conservative
Our current Saudi forecasts are based on average oil production of 9.1 million bpd in 2012, with increased output from Libya, and Brent crude averaging USD105.0 p/b. We have not changed our assumption at this point, but a continued shift away from Iranian oil imports would provide upside to Saudi’s oil production outlook. We estimate that if Saudi output is maintained at 10.0 million bpd in 2012, this would result in real GDP growth of 5.6% (versus our base case scenario of 3.0%). Any production (and thus oil revenue) increase would also provide upside to our nominal GDP, fiscal and current account surplus forecasts.

We do not expect to see a change in 2012 policy as a result of higher oil income, with government expenditure already expected to remain expansionary. It will, however, bolster domestic and market sentiment and result in a stronger build-up of FX reserves, which in turn will support the medium-term spending outlook. We also see upside to our oil price assumption in 2012 given the geopolitical tension, albeit less than for Saudi oil output. Higher Saudi production to compensate for embargoed crude could help to dissipate some price.