Market Extra: As U.S. cuts, Saudi oil-rig counts hit record highs

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Markets/commodities reporter

Saudi Arabia has been making some big moves lately, most notably in its leadership reshuffle, but the country also has raised the number of rigs it has actively drilling for oil and natural gas by 30% since March 2014.

James Williams, an energy economist at WTRG Economics, suggests that the Saudis are working toward increasing their oil-production CLM5, +0.30% LCOM5, +1.52% capacity to gain even more leverage over the oil market than they already have as the Organization of the Petroleum Exporting Countries’ so-called swing producer.

The concept isn’t totally new, as some media reports also mention Saudi efforts to boost production capacity, but the recent changes to the nation’s government could be seen as backing that all up.

King Salman bin Abdulaziz, who rose to the throne in January of this year, recently replaced his crown prince and foreign minister — appointing his nephew Deputy Crown Prince Mohammed bin Nayef as his new heir apparent.

Khalid al-Falih was also chosen to replace longtime oil minister Ali al-Naimi as the new chairman of state-owned oil company Saudi Aramco.

The King is populating his cabinet with younger people to prepare for a “generational shift,” said Williams, adding that the new crown prince and his deputy could easily rule the kingdom for four or five decades.

This comes at a time when the King is also “developing the capacity to diminish Iranian influence in the Arab countries,” Williams said.

And maybe Saudi Arabia is using its power in the oil market to do just that.

The most recent data from Baker Hughes BHI, -0.42% show that Saudi Arabia had 125 active oil and gas rigs in March of this year, up from 96 the same time a year earlier. The total represents an all-time high, according to Williams, who provided a chart (included below) based on data from Baker Hughes. He said the number of active oil rigs is at a record too.

The rig count has climbed despite the fact that the “world market is still flooded with oil,” Williams said. “This indicates that the Saudis are expanding production capacity,” he noted. That is excess capacity that could be used at any time to “flood the market and crash the [oil] price.”

That could limit Iranian income and its ability to interfere with Arab affairs, speculated Williams.

But not everyone thinks so.

Michael Lynch, president of Strategic Energy & Economic Research, said he believes the leadership changes have more to do with the “issue of security and putting in place a younger generation who has been more active on both controlling domestic terrorism and confronting Iran and its allies.”

Besides, if Iran returns to the market following a nuclear deal with the West to lift oil sanctions, the “Saudi’s could have spare production capacity to spare,” said Lynch.

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