Oil Market is Bewildered

The oil market is bewildered.

That’s what Bjarne Schieldrop, the Chief Commodity Analyst at SEB, outlined in a report sent to Rigzone on Thursday, adding that it cannot quite figure out whether the latest extension of Saudi Arabia’s unilateral cut to the end of the year is a reflection of weakness to come, and an effort to preemptively trying to avoid the oil price from falling below $85 per barrel amid coming weakness, or an effort to drive the oil price to $100-$110 per barrel by the end of the year.

“If the IEA’s latest calculations for global demand in Q3 and Q4 are correct, and Saudi sticks to its cuts, then global inventories will indeed decline by 250 million barrels by year end and Brent crude will rally to $100-$110 per barrel - and Saudi Arabia will get a lot of blame,” Schieldrop said in the report.

“The latest action from Saudi Arabia, if it drives the oil price to $100 per barrel or higher, must indeed lead to political heat from the U.S.,” he added.

Schieldrop also outlined in the report that “there is a possible excuse” for Saudi Arabia’s actions.

“We know that interest rates have been lifted rapidly over the past 12-18 months and that this is leading to global economic cooling for the year to come,” he said in the report.

“Add China’s struggling housing market to this. Western consumers are buying less stuff from China. Chinese consumers are buying less stuff because they fear the economic situation. Chinese exports are down 8.8 percent year on year and imports are down 7.3 percent year on year,” he added.

“Saudi Arabia has one of the biggest physical oil books in the world. As such it can see the cards of its oil purchasing clients on a 1-2-3 months forward basis. It can see what they are booking and ordering for the coming 1-2-3 months. IEA’s calculations is the global balance on paper. It is a static snapshot. But the world is dynamic and changing all the time,” he continued.

“So, it is possible that the extension of Saudi Arabia’s unilateral cut is a counter to weakness to come and an effort to avoid the oil price from falling below $85 per barrel rather than an effort to drive the oil price to $100 per barrel or higher. It is impossible to know for sure. What we can be pretty confident about however is that Saudi Arabia together with Russia are comfortably running the show,” Schieldrop went on to state.

Highlighting “another twist” in the report, Schieldrop said Saudi Arabia always has the option to change course in October and November.

“If it turns out that the cuts are too deep and the market is overly short oil, then it can lift production November and December if need be,” he noted.

In a market update sent to Rigzone this week, Rystad Energy Senior Vice President Jorge Leon outlined that the extension of Saudi Arabia’s one million barrel per day cut and Russia’s 300,000 barrel per day export cut to the end of the year “significantly tighten the global oil market and can only result in one thing - higher oil prices worldwide”.

The Rystad SVP noted in the update that Chinese macroeconomic sentiment is a potential downside risk but added that Rystad’s latest mobility indicators “do not show an imminent deceleration that could justify such a move by Saudi Arabia”.

Ann Louise Hittle, Wood Mackenzie’s Vice President of Oil Markets, told Rigzone earlier this week that the Saudi cut alone of one million barrels per day in October-December, if implemented for all three months, would tighten the market into winter, “supporting prices, already in the high $80s, into a range around $90 per barrel to $95 per barrel”. 

“If prices move above $100 per barrel, the Saudis could ease off the full one million barrel per day cut at some point in the fourth quarter,” Hittle added.

“Russia’s production cut, if implemented fully, would add extra pressure on prices,” Hittle continued.

A statement posted on Saudi Arabia’s energy ministry website on September 5 said, “an official source from the ministry of energy announced that the Kingdom of Saudi Arabia will extend the voluntary cut of one million barrels per day, which has gone into implementation in July and was extended to include August and September, for another three months until the end of December 2023, and in effect, the Kingdom’s production for the coming months of October, November, and December will be approximately nine million barrels per day”.

“The source stated that this voluntary cut decision will be reviewed monthly to consider deepening the cut or increasing production,” the statement added.

“The source also noted that this cut is in addition to the voluntary cut previously announced by the Kingdom in April 2023, which extends until the end of December 2024. The source confirmed that this additional voluntary comes to reinforce the precautionary efforts made by OPEC Plus countries with the aim of supporting the stability and balance of oil markets,” it continued.

To contact the author, email andreas.exarheas@rigzone.com