Rumors of Saudi Arabia’s new oil price warn off OPEC cut violators

Oil price gains reversed again after reports emerged that OPEC’s top oil producer, Saudi Arabia, is rumored to be looking to speed up the process of withdrawing oil production cuts. The Brent forward curve took a circuitous path in September, moving from a significant downgrade in late August to flat on September 10; this was followed by a gradual recovery and a dip until September 24 and then a further flattening.

Oil futures continue to be heavily bearish: 3 days ago, Wall Street Journal reported that the number of short positions held by money managers in Brent futures exceeded the number of longs for the first time on record, due to the prospect of more OPEC+ crude hitting the markets in the near future.

Last week, the Financial Times reported that Saudi Arabia was ready to abandon its unofficial $100-a-barrel price target for crude oil as it prepares to increase production, effectively signaling that it is resigned to a prolonged period of lower oil prices.

Previously, Saudi Arabia and seven other OPEC+ members had been due to reverse long-standing production cuts since early October. However, a two-month delay has fueled speculation about when to ramp up production, with Brent prices falling below $70 a barrel on renewed demand fears and a weak Chinese economy. The FT reported that the kingdom has now committed to bringing that production back as planned on December 1, regardless of market conditions and oil prices at the time, as the country seeks to avoid a larger market share for non-OPEC producers, including the U.S. United.

There are however plenty of detractors, including OPEC, who denied earlier this week that it had a new price target.

However, the Saudi rumors are certainly worrying for oil markets given the huge role the country has played as OPEC’s key producer. Indeed, Saudi Arabia currently accounts for 2 mb/d of 2.8 mb/d production cuts from OPEC members and a total of 3.15 from OPEC+. Saudi Arabia’s contribution is essentially double that of the entire group, with only the Kingdom and Kuwait cutting production by a double-digit percentage. In fact, much of the lower production by other OPEC+ members is not voluntary, but rather reflects their inability to meet their quotas.

Related: U.S. oil demand shines as China eases

However, commodity analysts at Standard Chartered took a more nuanced view of the ongoing situation. According to StanChart, Saudi Arabia’s production increase of 84 thousand barrels per day (kb/d) every month from December 2024 does not necessarily mean that the Kingdom has changed its policy and is targeting market share, pointing out that Saudi Arabia it didn’t have a price. target for many years. In StanChart’s view, the main underlying story is that Saudi Arabia is sending a warning that it will accelerate the removal of voluntary cuts if all partners involved fail to meet their commitments. StanChart sees Saudi Arabia’s latest move as one of several warnings it has issued lately to any country that tries to stop at the mercy of others.

Compliance with commitments will be key to determining whether oil markets remain tight or not.

In July, Russia, Iraq and Kazakhstan submitted their compensation plans to the OPEC Secretariat for overproduced crude volumes in the first six months of 2024. According to OPEC, all overproduced volumes will be fully compensated over the next 15 months until September 2025, with Russia “paying back” a cumulative amount of 480 kb. /d, Iraq 1,184 kb/d and Kazakhstan 620 kb/d. According to StanChart, offsetting production cuts by the three OPEC members amount to a combined cut of 370 kb/d in October and then an amount ranging between 162 kb/d and 206 kb/d for November 2024 to September 2025. StanChart determined that the addition of the compensation program to the recently announced reduction in targets due to the delay in the implementation of the phase-down will lead to a drop in OPEC production by 530 kb/d in Q4-2024; 540 kb/day lower in Q1 and Q2-2025 and 560 kb/day lower in Q3-2025, if all commitments are met.

StanChart argued that the current market assumption that there will be no offset cut is wrong because other OPEC+ countries are highly unlikely to take it lightly. StanChart says Saudi Arabia is unlikely to accept any further backtracking on promises made by overproducers, noting that high-profile visits to Iraq and Kazakhstan by OPEC Secretary General Haitham al Ghais suggest OPEC intends to continue promised cuts.

“We have received strong assurances that Iraq remains fully committed to the DoC’s ongoing market stabilization efforts. During this visit, Iraq presented clear and decisive steps to offset the overproduced volumes and gave assurances that it will achieve full compliance in the future, ” al Ghais said after visiting Baghdad.

The budget deficit

Saudi Arabia is unlikely to be too adamant about its pace of easing, given that the country is already facing a significant budget deficit at current oil prices. After enjoying a rare budget surplus in 2022, most Gulf Cooperation Council (GCC) economies are seeing their budget deficits widen, with current oil prices still well below what they need to balance their budgets.

According to the IMF, Saudi Arabia, the GCC’s largest economy, needs an oil price of $96.20 per barrel. to balance their booksthanks in large part to MBS’s ambitious Vision 2030. The situation isn’t helped by the fact that the oil-rich nation has borne the brunt of OPEC+ production cuts over the past few years. The kingdom is currently pumping 8.9 million b/d, the lowest level since 2011. In fact, Saudi Arabia sold less oil at lower prices, exacerbating the revenue shortfall.

That said, the Saudis can still afford to cause pain in the oil markets. As OilPrice.com contributor Irina Slav he notedSaudi Arabia can simply put the brakes on Vision 2030, turn it into Vision 2040 or even Vision 2050 if the oil markets refuse to cooperate. In addition, the FT reported that Saudi Arabia believes it has enough alternative financing options to weather a period of lower prices, including tapping foreign reserves or issuing sovereign debt.

In the final analysis, oil markets will simply have to wait before deciding to call Saudi Arabia’s bluff. Fortunately, the Covid-era oil crisis and oil price crash whipped OPEC+ into shape and many producers have maintained impressive production discipline since then. They are unlikely to be willing to engage in another race to the bottom, flooding the markets with oil.

By Alex Kimani for Oilprice.com

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