Is Saudi Arabia calling the market’s bluff over oil?

Oil market watchers have been keeping a close eye on Saudi Arabia ever since it announced last month that it could very well increase oil production if and when it wanted to, but analysts at Energy Aspects explained on Tuesday that the major oil producer could be calling the market’s bluff.

Saudi Arabia threatened to boost its already record-breaking oil output following the failure of a meeting of OPEC and non-OPEC producers in Doha in April to discuss a possible freeze of global oil production at current levels in an effort to support low oil prices.

The talks failed, mainly after Iran said it would not participate in a freeze, leading other Middle Eastern producers, such as Saudi Arabia, to refuse to do so unilaterally. Following the failure, Saudi’s Deputy Crown Prince Mohammed bin Salman warned that the kingdom could immediately increase output by more than a million barrels a day to 11.5 million.

Saudi Arabia is already widely blamed for a glut in supply in global oil markets as it, and the wider OPEC group, decided in November 2014 to defend its market share in the face of rival producers rather than to support prices, leading to a global decline in oil prices.

Oil prices fell on that threat and while they have since rebounded on outages in Canada and Nigeria, Saudi Arabia has been closely watched for any signs it is actually preparing to ramp up production.

Changes at the top of Saudi’s oil ministry and industry have only heightened those expectations, including a well-publicized IPO of its state oil company Saudi Aramco (whose Chief Executive Amin Nasser suggested last week that the company was ready to meet any call on it) and a replacement of its oil minister, with the influential long-time oil minister Ali al-Naimi replaced by Aramco chairman Khalid al-Falih.

Any increase is unlikely to happen anytime soon though, according to analysts at energy consultancy firm Energy Aspects, which published a noted on Tuesday suggesting that there is no reason to fear an imminent change of Saudi policy.

In fact, Energy Aspects said that Saudi Arabia would not even be producing its usual amount of around 10.2 million barrels a day (mb/d), according to OPEC monthly reports, this month and was unlikely to reach a high of 12.5 mb/d – Saudi Arabia’s reported full production capacity, according to Saudi Aramco’s Nasser – by the end of 2017.

“A lot has been happening in the oil market lately. Yet, what has caught everyone’s attention amidst this drastic U-turn in balances is Saudi Arabia. Undoubtedly these are uncertain times, but Saudi Arabia will not be producing 11 mb/d this month (especially since it has maintenance) and will not be reaching 12.5 mb/d by end-2017. Oil rigs have been falling, and output has been remarkably steady at 10.2 mb/d since August 2015,” Energy Aspects’ team said in the note.

The research consultancy also stated that any potential increase would not only take time, but would need more oil infrastructure, such as oil rigs, and that markets had generally jumped to conclusions about Saudi Arabia’s oil output plans.

“Moreover, Saudi Arabia has made no announcements that it will increase productive capacity. And while it would like to be prepared for a higher call on its crude as non-OPEC supplies fall fast, increasing capacity takes time. The 1.5 mb/d increase in productive capacity to 12.5 mb/d took six years to complete, by 2010. Even increasing production and maintaining it at 11 mb/d or higher needs more rigs, much like sustaining output at 10 mb/d required 20 more rigs,” it said.

In addition, Energy Aspects said that even the IPO of Saudi Aramco was “fraught with challenges, and has hardly generated interest amongst investors while several of the recent reforms may soon be reversed.”

“Of course, change is occurring, but the lack of institutional capacity to undertake such deep reforms means it takes time to implement such changes, and there will be plenty of obstacles along the way.”

The note blamed the media for its “perilous habit” of “boiling everything down to a soundbite, hardly helps, with various comments, taken entirely out of context, adding further fuel to the fire” and said that there was nothing concrete to suggest oil output was about to rise.

It said that a number of expectations about Saudi Arabia’s oil strategy were being based on assumptions and conjecture, rather than fact.

“Saudi Arabia will not change its policy of accommodating others (but) it does not mean (new energy minister) Al-Falih will purse the opposite policy of increasing production to flood the market. He has even taken to Twitter to reiterate that Saudi Arabia will continue with stable oil policies — if only the market would listen.”