Is Saudi Arabia Able to Flood the Oil Market?

People are still ruminating on the IEA's last report, where an oil crunch is predicted about the year 2012. The Oil Drum blog publishes a detailed and illustrated note predicting oil price of 200 $ per barrel in five years. But five years is a long time and I am interested in what will happen on November the 11th. 2007 alone. The success of my Brent Futures Put Option speculation is function of a repeat of what happened on the autumn of 2006, when the Saudi kingdom inundated oil markets and collapsed the price. If for some reasons of theirs the Guardians of the Faith want to repeat their last year action, do they have the spare capacity for it? That is the question.

Oil Drum that explains Saudi Arabia’s current surplus capacity situation within an OPEC context by quoting IEA's June report:

Notional spare capacity stands at 4.0 mb/d, while our measure of effective spare capacity (excluding Indonesia, Iraq, Nigeria and Venezuela) stands at 2.85 mb/d. Although these volumes are physically producible, even this lower figure likely overstates what OPEC could actually shift onto the market given current prices and shortages in refinery upgrading capacity. Heavy, sour Saudi Arabian and Kuwaiti crude accounts for 88% of the effective spare capacity figure. In the absence of substantial discounts, these volumes might struggle to find buyers while sizable amounts of refinery upgrading capacity remain offline for scheduled and unscheduled maintenance. Readily marketable spare crude capacity may therefore be much lower, and a more accurate reflection of current market tightness

. The Oil Drum comments: "This IEA paragraph says that the world has only 0.35 mb/d spare capacity of readily marketable light sweet crude because the spare capacities of 2.20 mb/d from Saudi Arabia and 0.30 mb/d from Kuwait are hard to sell heavy sour crudes. Given the statements in this IEA monthly market report, the following forecast assumes no effective spare capacity of easily marketable Saudi Arabia crude."

My interpretation is totally opposite to Oil Drum: The Saudis have a large standing surplus capacity, but the distillation bottleneck limits their sales. They could offer and sell the surplus oil at a lower price, crashing the oil's price. But possibly they could not sell it since refineries are working at full capacity and are processing all the crude they can, having the gasoline markets fully supplied and the reservoirs fully topped. There is no scarcity of oil. When the driving season is over, gasoline demand will fall and there will be a surplus offer of gasoline and less demand for crude and prices may fall. In my opinion, it is quite possible that the Saudis don't even have to increase their oil offer, it is enough that they maintain current supply to make prices collapse.

All will be decided during OPEC's September meeting. The pic shows Nobel Brothers Oil Fields in Baku during the turn of the century, when this region produced 2/3 of world oil.