OPEC sees Saudi Arabia’s oil cut as key to tightening oil market
Available data from the Organization of Petroleum Exporting Countries (OPEC), has indicated that Saudi Arabia’s latest oil production cuts are set to tighten global markets sharply next month.
Even before the kingdom announced its surprise new measures just over a week ago, the Organization of Petroleum Exporting Countries expected that world inventories would deplete rapidly in the second half amid a post-pandemic recovery in fuel demand.
With the one million barrel a day cutback to be implemented by Riyadh in July and possibly longer the shortfall will intensify. World consumption will exceed supplies by roughly 2.7 MMbpd next month, a report from OPEC indicated on Tuesday.
If the kingdom opted to extend the reduction for the whole third quarter, it would be the biggest deficit since 2021.
Despite the projected tightness, crude traders have so far reacted with indifference to the new curbs unveiled by Saudi Energy Minister, Prince Abdulaziz bin Salman on June 4. Brent futures have declined 4 per cent to near $73 a barrel since Riyadh’s plan emerged, as fears over lackluster demand in China take center stage.
The price retreat may be welcomed by the U.S. and other consuming nations, which have condemned OPEC and its allies for stoking inflation by withholding oil supplies. But it could be painful for producers like the Saudis, which the IMF believes needs oil prices above $80 to cover government spending.
OPEC’s 13 members cut supplies last month by 464,000 bpd to just over 28 million a day as they implemented curbs announced in April, according to the report. That’s considerably short of the 29.9 million a day that the group estimates is needed in the third quarter, even before the new Saudi cut is applied.
Once Riyadh goes ahead with the extra 1 MMbpd reduction in July, the shortfall will deepen to roughly 2.7 MMbpd. Prince Abdulaziz has said he will keep markets “in suspense” on whether the cut will remain in place in later months.
The organisation’s forecasts hinge on a significant increase in global demand next quarter, of about 1.2 MMbpd. For 2023 as a whole, OPEC’s Vienna-based secretariat predicts that consumption will climb by a hefty 2.3 MMbpd, to average 101.9 million a day.
The International Energy Agency, which advises consuming nations, will release its latest projections for global supply and demand — including its first detailed assessment of 2024 on Wednesday.
