US President Donald Trump said in a tweet on Saturday that Saudi Arabia has agreed to increase oil production by 2 million barrels per day (bpd).
OPEC’s decision in June to raise production by 1 million barrels per day appears increasingly inadequate in dealing with the growing number of supply disruptions around the world. It is therefore not surprising that Trump wants more Saudi oil in the market. Saudi Arabia produced 10 million barrels a day in May, and recent reports suggest it could add up to 800,000 bpd to 1 million bpd in July, a huge increase in such a short period of time.
However this is far from the 2 million bpd that Trump believes Saudi Arabia will add. This would translate into a total production of about 12 million barrels a day, which is probably unrealistic for a few reasons, some of which we’ll go through:
First: There are various questions about just how fast Saudi Arabia can really push its oil fields. Can it reach 12 mb / day? Perhaps, but realistically, there is not much historical evidence on it. Also, they probably cannot do it immediately and it may take some time — could be even more than a year.
The second reason: This is, in fact, the most important why Saudi Arabia will not comply with Trump’s wishes to add 2 million barrels per day to the market: They simply do not want to. An increase at this level would leave the oil market extremely low on capacity, leading to a reduction to less than 1 million barrels per day. At this point, any disruption in supplies will lead to a rocketing of oil prices.
Of course, Saudi Arabia is aware of this and for this reason it is very difficult to add 2 million barrels. Perhaps that is why the White House retracted President Trump’s comments when publishing the details of Trump’s conversation with King Salman. In response to the president’s assessment of the oil market deficit, King Salman stressed that the Kingdom has a reserve capacity of 2 million barrels per day, which it will use with caution if necessary to ensure market equilibrium and stability.
However, it is likely that Trump is right that the oil market needs more supply. OPEC could struggle to meet the emerging supply gap, which seems to be getting worse with each passing day. Venezuela lost nearly 1 million barrels per day in the past two years and could lose 500,000 barrels a day over the next year. Trump could be responsible for disrupting about 1 million barrels per day of Iran’s oil supply.
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