Story By Andreas Exarheas |RigZone| Saudi Arabia is sensitive to the “weak level” of demand in the world leading to production cuts, according to Ed Morse, the Global Head of Commodities Research at Citi.
“Clearly the Saudis are sensitive to the weak level of demand in the world, especially from China, where, contrary to expectations, growth in the services sector has stalled out, just as it has in the goods sector, and the property sector is seeing even more significant problems in loan books than was expected, all of which are keeping demand growth lower than anticipated,” Morse told Rigzone.
“Another factor in market weakness appears to be too much supply, not just from the United States, but from the ‘Fragile Five’ OPEC countries, which combined produced 10.56 million barrels per day in June 2023, against 9.7 million barrels per day in June 2022,” Morse added.
The Citi Head told Rigzone that, given the lack of any concrete price response to the original one million barrel per day cut the Saudis announced for July, “as expected they extended their cuts by another month”.
“While Russia had announced a production cut in March, exports actually peaked in May,” Morse added.
“But Russian refiners are expected to undertake refinery maintenance between August and November and that, combined with an expected end to product subsidies, could enable them to increase profits from domestic product sales,” he continued.
“At the same time, another Russian motivation might be to see if lower exports could result in a reduction in the discounts Russian crude oil are receiving vs other crude streams like Brent,” Morse went on to state.
According to the U.S. Energy Information Administration’s (EIA) latest short term energy outlook (STEO), which was released in June, total petroleum and other liquids consumption came in at 99.93 million barrels per day in the first quarter of the year. This figure is projected in the STEO to be 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.
Total petroleum and other liquids production was 101.06 million barrels per day in the first quarter, the STEO showed. The STEO expects this figure to come in at 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.
U.S. petroleum and other liquids production were 21.02 million barrels per day in the first quarter, according to the STEO, which projected the country’s output to come in at 21.26 million barrels per day in the second quarter, 21.34 million barrels per day in the third quarter, 21.41 million barrels per day in the fourth quarter, and 21.26 million barrels per day for the whole of 2023. U.S. production was 20.21 million barrels per day in 2022, the STEO highlighted.
Total OPEC petroleum and other liquids production was 33.95 million barrels per day in the first quarter of the year, the STEO outlined. The STEO anticipates that this figure will be 33.73 million barrels per day in the second quarter, 33.17 million barrels per day in the third quarter, 33.21 million barrels per day in the fourth quarter, and 33.51 million barrels per day in 2023 overall. Total OPEC output was 34.17 million barrels per day in 2022, the STEO showed.
Only Option Was to Extend
Joseph Gatdula, the Head of Oil and Gas at BMI, a Fitch Solutions company, told Rigzone last week that “Saudi Arabia’s only option was to extend voluntary cuts into August given weakness in oil prices seen since they were first announced in early June”.
“A reduction or roll-back in the cuts would have been premature and likely would have had strong downside impacts to prices, as bearish sentiment is dominating price action,” Gatdula added.
The BMI Head also outlined that Russia’s continuation of a 500,000 barrel per day cut is likely to do little to impact physical trade, “as our estimates have less than half of the pledged cuts being implemented so far”.
In an oil trading alert sent to Rigzone on the morning of July 4, Rystad Energy Senior Vice President Jorge Leon and Rystad Senior Analyst Patricio Valdivieso outlined that the markets immediately reacted to Saudi Arabia’s production cut extension announcement.
“Rystad Energy believes that this move reinforces our thesis that this mechanism of a possible monthly extension of Saudi cuts limits downside price pressure for the rest of the year, regardless of the macroeconomic environment,” the analysts said in the alert.
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