- Brent prices climbed above $87 per barrel on Wednesday.
- Still, current oil prices might be too low for Saudi Arabia.
- Soft demand in China, India, or the U.S. may prompt Saudi Arabia to implement even deeper output cuts.
Last month, several commodity experts predicted the Saudis will prolong its voluntary production cut but taper off their extra cut by restoring 250,000-500,000 barrels a day of halted production in September. A week later, Saudi Press Agency (SPA) published confirmation that the country will indeed extend its 1 million barrels per day (mb/d) oil output cut into September, but with an important nuance that was largely missed by much of the media coverage that the cut “can be extended or extended and deepened”. This marks the first time Saudi Arabia has signaled a willingness to make even deeper cuts if the previous ones are taking too long to achieve the desired effect.
The first cuts certainly appear to have worked, with Brent prices climbing ~12% in the past month to a four-month high of $87.61 in Wednesday's intraday session. Still, current oil prices might be too low for Saudi Arabia since it needs $100-a-barrel crude to balance its books.
Weakening demand by major oil consumers might also persuade Saudi Arabia to cut even further. The latest data coming from China shows that crude oil imports fell 2.412mb/d m/m to a sixth-month low of 10.429mb/d as stockpiling wanes. It’s not clear if this is the beginning of a downtrend since June’s imports were the second highest on record as inventory building hit a torrid clip. To be fair, the y/y increase in crude oil imports in July was a hefty 1.519mb/d, 17% higher than the volume a year ago.
Meanwhile, India’s oil demand for the month of July clocked in at 4.70mb/d, weaker than Wall Street’s expectations of 4.83mb/d. The country’s pace of y/y demand growth slowed from 190 thousand barrels per day (kb/d) in June to 84kb/d in July. The data here again is mixed because gasoline demand growth increased to 6.3% in July from 6.2% in June while diesel demand growth increased to 3.9% from 3.1%.
To Cut Or Not To Cut
Commodity analysts at Standard Chartered have wagered that Saudi Arabia will not deepen its cuts because crude inventories are likely to fall sharply going forward.
But the EIA appears to be less optimistic. The agency estimates that the call on OPEC crude will average 28.1mb/d in H2, 1.4mb/d less than StanChart’s model; 2.0mb/d less than the International Energy Agency (IEA) model and 2.3mb/d less than the
OPEC Secretariat model. StanChart has predicted large deficits in August and September but zero surpluses until the seasonal demand falls in January whereas EIA has predicted several surpluses during that period. The analysts have opined that Saudi Arabia might decide to wait till the statistical fog clears before deciding whether or not to deepen its production cuts.
Tightening Oil Markets
Most energy experts have predicted that global oil markets will gradually tighten, which should boost prices as the months roll on. The International Energy Agency(IEA) in Paris has predicted an oil shortage of about 1.7 million barrels a day during the second half of the year. Commodity experts at Standard Chartered have predicted that global oil markets will register a supply deficit of 2.81 million barrels per day in August; 2.43mb/d in September and more than 2mb/d in November and December. The analysts have also projected that global inventories will fall by 310mb by end-2023 and another 94mb in the first quarter of 2024 thus pushing oil prices higher. According to the experts, Brent prices will climb to $93/bbl in the fourth quarter.
The natural gas market is, perhaps, even harder to predict right now because prices are flying despite fundamentals remaining weak and supply plentiful. European natural gas prices rocketed more than 30% on Wednesday, as traders panicked over the possibility of reduced LNG supply from Australia, the world leading supplier of the commodity. The European benchmark, TFF, jumped to as high as €42 per megawatt hour in Wednesday intraday trading, 35% higher than the previous day, and its highest point since mid-June.
EU natural gas inventories, however, have continued rising at a record clip, moving above 100 billion cubic meters (bcm) on 2 August for the first time this injection season. According to data from Gas Infrastructure Europe (GIE), inventories stood at 101.3bcm on 6th August, a good 87.4% of maximum fill. The average rate of refill over the past week, however, slowed to 308 million cubic meters per day (mcm/d) from 339 mcm/d the previous week, still nearly 90% of the five-year average rate. StanChart has estimated that Europe will have to slam the brakes on its gas refill to around 44.7% of the five-year average if it is to avoid storage constraints.