An additional one-million-barrel-a-day unilateral cut by Saudi Arabia, which will take effect in July, along with seasonally stronger demand, should help tighten the market physically in the third quarter.
That’s according to analysts at BMI, a Fitch Solutions company, who made the statement in a new report sent to Rigzone.
“Producers in the Middle East and North Africa (MENA) tend to export less crude during their summer season, when crude production is diverted to the domestic market, to meet peak demand,” they stated analysts in the report.
“This trend is not limited to MENA, as global oil consumption typically rises between June and September. Much of this is due to higher demand for gasoline and jet fuel, spurred by increased travel.” , the analysts added.
“Air traffic is still recovering from the pandemic, while American driving is off to a strong start, both of which should reinforce seasonal trends,” the analysts continued.
In the report, IMC analysts admitted that barrels from Saudi Arabia’s additional cut could be returned in August, but stated that “it seems more likely that the kingdom will opt for a renewal in the months following or by a gradual increase in production, so as not to risk a fall in prices”.
“In theory, this should support oil price gains. However, price action through much of 2023 has been decoupled from fundamentals, which remain relatively resilient,” the analysts said in the report .
“This is evident in the changes seen in term spreads and managed monetary positioning in Brent…prices have struggled to hold on to gains this year, despite repeated and robust market interventions by OPEC+,” the analysts added.
“On the upside, Brent appears to have found a floor around the low $70s, but gains have been limited by short sellers and overall bearish macro sentiment,” the analysts continued.
Swing Sharp
In a separate report sent to Rigzone last week, analysts at Standard Chartered said they expect fundamentals to tighten enough to exert greater force on prices.
“Our supply and demand model shows a sharp swing from a surplus of 1.41 million barrels per day in April to deficits of 1.33 million barrels per day in July and 1.70 million of barrels per day in August, helped by seasonal changes in demand and production cuts from key Middle East producers,” analysts added in that report.
In the U.S. Energy Information Administration’s (EIA) latest Short-Term Energy Outlook (STEO), which was released in June, total net drawdowns of crude oil and other liquids inventories were projected to reach to 0.20 million barrels per day in the third quarter and 0.01. million barrels per day in the fourth quarter. The STEO forecasts a total stockpiling of 0.52 million barrels per day during the second quarter.
Total oil and other liquids production is expected to rise to 101.33 million barrels per day in the second quarter, 101.40 million barrels per day in the third quarter and 101.69 million barrels per day in the fourth quarter, showed STEO. Total consumption of oil and other liquids in the STEO is forecast at 100.81 million barrels per day in the second quarter, 101.60 million barrels per day in the third quarter and 101.69 million barrels per day in the fourth quarter
In its previous STEO, which was released in May, the EIA projected total stockpiles of 0.29 million barrels per day in the second quarter and 0.04 million barrels per day in the fourth quarter. A total draw of 0.00 million barrels per day was expected during the May STEO third quarter.
Saudi Cut
In a statement sent to Rigzone last month, Bjarne Schieldrop, chief commodity analyst at Skandinaviska Enskilda Banken AB (SEB), noted that Saudi Arabia’s additional 1 million bpd cut was a “ big surprise for the market”.
“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,” Schieldrop said in the statement.
“If July’s 1 million bpd cut is unnecessary, it will be unwound by August and, if necessary, Saudi Arabia can support OPEC+ to make a combined cut from August,” he added.
In a market update sent to Rigzone in June, Rystad Energy senior vice president Jorge Leon said “the sheer possibility that the Saudi production cut will extend beyond July will limit the downward pressure on prices for the rest of 2023.”
In the update, Leon noted that Saudi crude output in July would fall to just under nine million barrels per day, which he noted is the country’s lowest level since June 2021.
To contact the author, please send an email andreas.exarcheas@rigzone.com
