LONDON (Reuters) - Saudi Arabia’s cushion of spare oil capacity would shrink to almost nothing if the kingdom quickly ramps up to 10 million barrels per day (bpd), Goldman Sachs’ global head of commodities research said on Monday.
Last week the kingdom said it would unilaterally produce as much oil as the market needed after the Organization of the Petroleum Exporting Countries failed to reach agreement as a whole on output policy.
Saudi newspaper al-Hayat reported Saudi Arabia would boost output to 10 million bpd in July, which Jeff Currie of Goldman Sachs said would leave only 500,000 bpd spare.
“If you get up to (10 mln bpd) you start to really create a very tight market relative to spare capacity,” he told the Reuters Global Energy and Climate Summit.
“But the question that’s more appropriate is when do you get to 9.5, when do you get to 10? Because when you start to look out over the horizon, their ability to create more flexibility in spare capacity increases tremendously.”
Extra output from Saudi Arabia would reflect increased refinery demand, said Currie.
“When you look at OPEC production, it’s highly correlated to refinery runs in the key consuming regions.
“The ramp up in refining runs over the next six months will be very significant.”
Currie remained bullish on all the components of what he referred to as the “CCCP group” of commodities — crude, copper, corn and soy beans and platinum — because investment in them is subject to political and other constraints.
But the simple commodities story of the very end of the last century when the complex was driven by “decades of under-investment” had changed as high prices spurred investment.
“Is the world a different place? Absolutely yes. It’s no longer a structural bull market.”
On the oil market, the strength has been concentrated on Brent, which on Monday traded at close to $120 a barrel and reached a record premium to U.S. crude of more than $20.
Currie said the unusual spread between the two contracts reflected excess light, sweet crude in the United States.
“It’s a U.S. issue. There’s a surplus of light, sweet crude in the U.S. Gulf Coast,” Currie said.
The distortion between the two benchmarks has been widely used as an argument for a third benchmark.
Currie said he saw the case for a sour market to complement Brent and U.S. crude futures, saying U.S. crude Mars, Middle Eastern grade Dubai and Russian Urals were all possible candidates.
Additional reporting by Emma Farge; editing by William Hardy