- Several analysts have concluded that Saudi Arabia may want to raise production this autumn in order to regain lost market share.
- Goldman Sachs: oil demand had hit a record in July, reaching 102.8 million barrels daily.
- Saudis decided to cuts oil production 250,000 to 500,000 barrels daily from next month.
Earlier this week, media reported that oil production from the members of OPEC had fallen to the lowest since 2021—or 2020, depending on the source—thanks to voluntary production cuts from Saudi Arabia and involuntary declines in Nigeria, Angola, and Libya. The news naturally pushed oil prices higher. Yet they have already begun to climb as traders have finally started paying attention to the supply warnings and demand projections that banks and other analysts have been issuing for weeks. The jump in prices should have made Riyadh happy, and it probably did. The question now is how much higher the Saudis would let prices go before starting to relax their cuts. The Saudi Arabian economy grew by a modest 1.1% in the second quarter of the year, which was down from 3.8% in the first quarter. Media and analysts attributed the slowdown to lower oil prices, even though the Kingdom’s non-oil sector booked a pretty healthy 5.5% growth rate. Yet the weight that the oil trade has in the overall economy remains overwhelming despite Riyadh’s efforts to diversify. And this means that it needs even higher oil prices—to continue with the diversification efforts. The Saudis can keep the cap on output for exactly as long as they need to in order to get prices where they want them to be. It is yet another demonstration that not only is OPEC very much alive and relevant in today’s world, but its de facto leader still has plenty of sway over the group. “The kingdom will want to see a protracted rise toward $90 a barrel and possibly improvement in Chinese economic data to start considering putting the 1 million barrels per day back into the market,” PVM Oil Associates analyst Tamas Varga told Bloomberg earlier this week. Meanwhile, Goldman Sachs updated its outlook on oil demand in a way that should please Riyadh.
The bank said oil demand had hit a record in July, reaching 102.8 million barrels daily, and that this would lead to a deficit of 1.8 million bpd in the third quarter of the year.
In such a context, there is really no rush for Saudi Arabia to return those barrels to the market. Especially if they are not exactly a whole million. This was suggested by an unnamed EU source who said that the production data for Saudi Arabia showed no cuts were being made from fields that the Saudis operate in a neutral zone that the Kingdom shares with Kuwait. In other words, Saudi Arabia may be cutting some barrels but pumping plenty in the neutral zone and selling those “under the radar.” This would allow it to benefit from higher prices, boost its market share, and simultaneously continue to exert upward pressure on prices with the official cuts. The American Petroleum Institute reported an estimated 15.4-million-barrel inventory drop for last week. The massive figure seriously exceeded analyst expectations, which were for a much more moderate inventory decline of less than a million barrels.
Traders are rushing to cover their short positions in oil, too, and this is boosting prices further. The benchmarks jumped to a three-month high this week as funds bought crude and fuels and changed their bets from bearish to bullish.
All this works in Saudi Arabia’s favor, and it also suggests prices could reach the level Riyadh would like to see sooner rather than later. Some, like Energy Aspects’ Amrita Sen, have forecast that Brent could hit $100 before the year’s end thanks not just to cuts but the shrinking inventories as well. Reuters is also reporting that global oil inventories are in decline. It would take a negative GDP growth reading for the U.S. or China to stop this rally. NN: I find it interesting at the first little pull back in this oil rally both Russia and the Saudis announced further production cuts going into October. What told me its game on in this rally is the homungas drop in US oil inventories reported this week…WOW!