Saudi Arabia’s output is now about 8 million barrels a day, after shutting the Safaniya and Zuluf fields – which are out in the water – as a result of the issues with the conflict involving Iran. This cut in production shows a bigger problem with supply from the Gulf area, as getting shipments through the Strait of Hormuz has become unreliable.
Details of the production cut and how big it is
Industry people have said the Safaniya and Zuluf fields were shut down, and that this has lowered Saudi production by more than 2 million barrels a day. These fields mostly make heavy and medium-heavy crude oil, which is used in certain ways at oil refineries and affects the market differently from lighter crude.
In February, Saudi Arabia was producing and sending out a lot more oil – almost 10.9 million barrels a day in production, and over 10.1 million in shipments. So the recent cut is a big drop from the levels of production the country had ready to go earlier in the year.
Problems in the Strait of Hormuz and cuts in output across the region
Since the end of February – when attacks in the air hit places in the area – the Strait of Hormuz has had blockages and a higher risk, which has made Gulf countries reduce the amount of oil they send out. This narrow waterway, which is really important for a large part of the world’s oil that is moved by sea, has become a choke point for crude oil shipments.
The International Energy Agency has reported that Gulf countries – including several in the area – have cut at least 10 million barrels a day in total. This shows how quickly stopping access by sea can turn into big losses in production and in exports.
Sending oil to Yanbu, and the problem of crude oil types
Saudi companies have increased the amount of oil going to Yanbu – on the Red Sea coast – in order to stay away from the Strait of Hormuz. However, the pipelines to Yanbu are mainly for light crude, which means it can’t take in large amounts of the heavy and medium-heavy crude lost when the Safaniya and Zuluf fields were closed.
This difference in oil type means that oil might be available in theory, but some oil refineries can’t use it without mixing it with other oil or swapping it for something else. This imbalance in the types of oil could make refineries change how they run, or look for oil from other places – which would make getting oil around more difficult and expensive.
What this means for the market, the risk of price rises, and what governments can do
Losing millions of barrels a day from the Gulf makes world markets tighter and puts pressure on prices to go up. Iran has said oil could get to $200 a barrel in the worst case, a political statement that raises the risk people are willing to pay and makes the market more worried, even if that price isn’t certain to happen.
People who make policy, and those in the market, will be watching how much oil is in storage, where tankers are, and whether countries will release oil from their emergency supplies. Countries might use their emergency oil stocks, or try to find diplomatic solutions to reopen shipping lanes, while oil companies will think about changing where they send oil and moving supply chains.
What will happen next: what would help things get better, and what to watch for
The quickest way to ease the pressure on supply would be to quickly get shipping moving again through the Strait of Hormuz. If it reopened, Gulf countries could restart offshore platforms and get exports back to where they were before the trouble, over weeks or months.
Important things to watch are reports on tanker traffic, how much oil is going through pipelines to other ports, how fast refineries are running, and what official statements are made by countries that produce oil about when they will restart. Insurers and those who rent out ships will also give signals about whether shipping can go back to normal with prices people can manage.
The situation is still changing. The fact that heavy-grade oil isn’t being made, the limits on sending oil to Yanbu, and the wider cuts in the region all mean that markets could stay tight until shipping flows are stable or other supplies are found.
