Saudi Arabia has once again reminded the world oil market who is king.
That’s what Bjarne Schieldrop, chief commodity analyst at Skandinaviska Enskilda Banken AB (SEB), said in a statement on the latest OPEC+ moves, which was sent to Rigzone this week.
“The big surprise for the market was Saudi Arabia’s unilateral cut of one million barrels per day for July 2023,” Schieldrop said in the statement.
“The additional cut will ensure oil prices do not fall below $70 a barrel, prevent inventories from rising and create a great tactical negotiating setup for the upcoming OPEC+ meeting on 4-6 July,” he added.
“If July’s one million bpd cut is unnecessary, then it will be rolled out by August, and if it was really needed, Saudi Arabia can support OPEC+ to make a combined cut from of August,” he continued.
“The cut will bring Saudi Arabia and Russia together and pave the way for joint cuts if needed, for example, it could move Russia from involuntary reductions to deliberate reductions,” he continued to note.
In the statement, the SEB analyst highlighted that $80 per barrel is the new $60 per barrel and said that is probably what Saudi Arabia is aiming for.
“Not only because this is what Saudi Arabia needs, but also because this is what the market needs,” Schieldrop said in the statement.
“Another aspect is, of course, inflation. If the normal price of old oil was $60 per barrel, new oil should be closer to $80 per barrel adjusting for a 30 percent increase in cumulative inflation,” he added.
“There are still many concerns about a global recession, weak oil demand and lower oil prices due to extremely large and steep rate hikes over the past year. This is why bearish speculators, but OPEC+ has the upper hand,” he continued.
A multi-layered affair
In a report sent to Rigzone this week, analysts at Standard Chartered noted that the latest OPEC+ meeting was “a multi-layered affair with a number of important outcomes”.
“1/ targets were set for 2024, tidying up some of the quirks of the current baselines and targets, adopting a third-party data-driven verification approach for major outliers… and breaking target parity between Saudi Arabia and Russia”. analysts said in the report.
“2/ Adopt a similar data-driven third-party approach to assessing Russian production, with Saudi Energy Minister HRH Prince Abdul Aziz bin Salman, using Ronald Reagan’s phrase (taken from from a Russian proverb) “Trust, but verify, ‘. 3/ an extension of the voluntary cuts by some OPEC+ members first announced in April until the end of 2024,” they added.
“4/ an additional voluntary cut by Saudi Arabia (referred to by Prince Abdul Aziz as a ‘lollipop’ cut), of one million barrels per day in July, extendable beyond July if deemed necessary…Strengthen what were already tight balances in our model,” the analysts continued.
In the report, analysts said they expected global demand to exceed 1.24 million barrels a day ahead of global supply in July and said the shortfall would widen to 2.7 million barrels a day in August if the cut of lollipops continued.
“Market reaction could still be slow, but the scale of likely tightening in the third quarter should drag prices higher,” Standard Chartered analysts said in the report.
“We believe OPEC+ achieved much more than expected, and the additional layer of the lollipop cut appears to be a very credible way to accelerate inventory draws,” they added.
Analysts at Standard Chartered noted in the report that the latest short-term data seen by ministers ahead of the meeting “would not have discouraged them from taking action”.
“Hedge funds moved more to the short side since 2009 as a share of open interest, bringing our Crude Oil Manager Positioning Index to -100,” they said.
“Additionally, the latest Energy Information Administration (EIA) data was bearish on our bullish index, primarily due to large untimely crude oil accumulations,” they added.
Unequivocally bullish
In another report sent to Rigzone this week, analysts at Macquarie Bank Limited said: “in the near term, the additional cut from Saudi Arabia should contribute to further seasonal tightening (increased refining runs and completion of demand), looks clearly bullish and could help propel further gains in crude.”
“That said, beyond this apparently temporary (but expandable) cut, the meeting produced no binding changes to ’23 production levels,” they added.
“Continuation of voluntary cuts through the 24th could represent a bullish development in the medium term, but the potential for slippage remains and macro pressures may ultimately dominate balances next year,” the analysts continued.
In that report, analysts at Macquarie Bank Limited also warned that “continuing to reduce bid/support prices in the face of macro headwinds and non-OPEC+ growth may simply work to concentrate risk in ’24.”
“In cyclical terms, we anticipate a possible drop in shale costs in ’24, with significant reductions in OCTG [Oil Country Tubular Goods] is already materializing and potential for continued supply chain relief/healthier labor dynamics,” they added.
To contact the author, please send an email andreas.exarcheas@rigzone.com
