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Saudi Oil Gambit Moves to Phase Two

Apr 10, 2016 3:00 AM EDT

There's an oil supply crunch looming and Saudi Arabia and its local allies are positioning themselves to take advantage.In what would be the second phase of the kingdom's strategy to defend its market share against rival producers (most visibly U.S. shale), Gulf states are planning to raise output capacity to fill the hole left by the lack of investment in new projects elsewhere.

It may seem odd talking about an oil shortage when the world seems awash with the stuff and storage tanks are brimming, but listed oil companies are slashing spending for the second year running, leading the International Energy Agency's Neil Atkinson to warn of possible oil-security surprises in the “not too distant” future.

There are too few new projects being sanctioned by non-state oil companies to offset the inevitable decline in output from existing fields and to meet additional demand. This is expected to increase by 1.2 million barrels a day each year for the rest of the decade. New fields due to start producing this year and next are the result of investment decisions taken when oil was about $100 and expected to stay there.

The collapse in company spending is illustrated perfectly by the level of drilling activity. After all, if you don't drill, you can't get the oil out of the ground.

Drilling Collapse
In March, the worldwide rig count hit its lowest level since September 1999

http://www.bloomberg.com/gadfly/articles/2016-04-10/saudi-arabia-oil-gambit-moves-to-phase-two