February 23, 2024

Saudi Arabia has once again reminded the global oil market who is king.

That’s what Bjarne Schieldrop, the 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 to the market was the unilateral one million barrel per day cut of Saudi Arabia for July 2023,” Schieldrop noted in the statement.

“The additional cut will make sure the oil price won’t fall below $70 per barrel, prevent inventories from rising, and make for a great tactical negotiation setup for the next OPEC+ meeting on July 4-6,” he added.

“If the one million barrel per day July cut is unnecessary, then it will be unwound for August and if it indeed was needed then Saudi Arabia can strong-arm rest of OPEC+ to make a combined cut from August,” he continued.

“The cut will unite Saudi Arabia and Russia and open the way for joint cuts if needed, for example, it could move Russia from involuntary reductions to deliberate reductions,” he went on 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 just because that is what Saudi Arabia needs but also because that is what the market needs,” Schieldrop said in the statement.

“Another aspect is of course inflation. If the old oil price normal was $60 per barrel then the new should be closer to $80 per barrel adjusting for a cumulative inflation increase of 30 percent,” he added.

“There are still lots of concerns for a global recession, weakening oil demand and lower oil prices due to the extremely large and sharp rate hikes over the past year. That is the reason for bearish speculators but OPEC+ has the upper hand,” he continued.

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 series of important results”.

“1/ targets were set for 2024, tidying up some of the quirks of the current baselines and targets, adopting an approach of data-driven verification by third parties for the main outliers … and breaking the target parity between Saudi Arabia and Russia,” the analysts said in the report.

“2/ adopting a similar data-driven third-party approach to the assessment of Russian output, with Saudi Arabia’s Energy Minister, HRH Prince Abdul Aziz bin Salman, using Ronald Reagan’s phrase (itself taken from a Russian proverb) ‘Trust, but verify’. 3/ an extension of the voluntary cuts by some OPEC+ members first announced in April to the end of 2024,” they added.

“4/ an additional voluntary cut by Saudi Arabia (dubbed by Prince Abdul Aziz as a ‘lollipop’ cut), of one million barrels per day in July, extendable beyond July if considered necessary … It tightens what were already tight balances in our model,” the analysts continued.

In the report, the analysts said they expect global demand to run 1.24 million barrels per day ahead of global supply in July and said the deficit would widen to 2.7 million barrels per day in August if the lollipop cut was continued.

“Market reaction might yet prove slow, but the scale of the likely tightening during Q3 should drag prices higher,” the Standard Chartered analysts stated in the report.

“We think OPEC+ achieved far more than consensus expected, and the additional layer of the lollipop cut appears to be a very credible way to accelerate inventory draws,” they added.

The Standard Chartered analysts highlighted in the report that the last short-run data ministers would have seen before the meeting “would not have discouraged them from taking action”.

“Speculative funds moved the furthest to the short-side since 2009 as a share of open interest, taking our crude oil manager – manager positioning index to -100,” they said.

“Further, the latest Energy Information Administration (EIA) data was bearish according to our bull-bear index, primarily due to large counter-seasonal crude oil builds,” they added.

Unambiguously Bullish

In another report sent to Rigzone this week, analysts at Macquarie Bank Limited said, “in the near-term, the additional Saudi cut should contribute to further seasonal tightening (rising refining runs and end demand), appears unambiguously bullish, and could help drive additional upside in crude”.

“That said, beyond this apparently temporary (but extendable) cut, the meeting produced no binding change to ’23 production levels,” they added.

“Continuation of voluntary cuts through ’24 could represent a bullish medium-term development, but potential for slippage persists and macro pressures may ultimately dominate next year’s balances,” the analysts continued.

In this report, the Macquarie Bank Limited analysts also warned that “continuing to cut supply/support prices in the face of macro headwinds and non-OPEC+ growth may simply function to concentrate risk in ’24”.

“Cyclically speaking, we anticipate potentially falling shale costs in ’24, with meaningful reductions in OCTG [Oil Country Tubular Goods] already materializing and potential for continuing supply chain relief/healthier labor dynamics,” they added.

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

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