OPEC eyes response to oil price slump led by Saudi action
OPEC is eyeing a response to falling prices at the next meeting of the group’s top-level monitoring committee in September, with media reports indicating Saudi Arabia may trim exports to reverse a $10/b slump in last two weeks.
Oil prices have dropped 20% since April, with Brent trading below $57/b Thursday after a slew of poor global economic data and mounting fears of a worsening trade dispute between the US and China.
Arab Gulf states – which account for around half of OPEC’s output – require crude trade well above $70/b to balance their fiscal budgets.
However, officials told S&P Global Platts that the group and its allies will assess the market’s health at the Joint Ministerial Monitoring Committee on September 12 in Abu Dhabi. The JMMC includes both Saudi Arabia and Russia and selected producer countries and looks at the necessary production cuts to rebalance the market.
“The UAE will continue to support actions that help balance the oil market, and I am confident that our OPEC and non-OPEC partners will take a similar stance,” said UAE energy minister Suhail al-Mazrouei in a statement published on Twitter Thursday. “The fundamentals of the oil market are good. Global oil inventories are declining, demand is still at a good level. I am confident that OPEC+ will continue its strong commitment to agreed production levels. The UAE has committed to reducing the agreed production and is ready to continue its commitment to ensure market balance.”
Saudi Arabia cut output to 9.70 million b/d in July according to the Platts OPEC survey, which is some 600,000 b/d below its quota. Overcompliance to the 1.2 million b/d output cut as part of OPEC+ agreement has been a consistent approach by the kingdom. The same survey revealed OPEC production fell to a 5-year low in July.
The world’s largest exporter of crude may reduce its allocations to customers by 700,000 b/d next month in a bid to keep shipments below 7 million b/d in response to the decline in prices, unnamed Saudi officials told Bloomberg on Thursday.
Saudi officials didn’t respond to requests for comment from S&P Global Platts. Saudi officials had already said the kingdom would hold its exports below 7 million b/d in May and June to help draw down global inventories.
“Such incremental cuts would be consistent with Saudi’s historical pattern of cutting production aggressively in periods of weak demand, when there is no medium-term market share to be lost,” Goldman Sachs said in a research note.
Meanwhile, OPEC’s Joint Technical Committee with its allies is due to meet on August 19. The committee is set up to assess oil market fundamentals.
However, Petromatrix’s Olivier Jakob said OPEC has limited options apart from verbal intervention.
“In reality, Saudi Arabia does not have many options for stronger prices apart from cutting more in order to make more room for US crude oil exports. Those cycles of price support are however only temporary as the higher prices then bring even more US crude oil production,” he said.
“The only other option is to try a repeat of [former Saudi oil minister] Al-Naimi 2014 free-for-all in order to kill US shale, this did not work well last time but Saudi Arabia might be encouraged by all the reports of US crude oil producers facing difficult financial conditions,” he added.
Oil prices have fallen due to demand concerns around escalating trade tensions between the US and China, a stronger dollar and a weaker yuan.
The deteriorating global economic situation has seen rate cuts in emerging markets such as India and Thailand following a rate cut in the US as the oil market moves to price in risks around a possible recession.
However, some analysts have said that the plunge may be overdone especially given the supply cuts from OPEC, questions over US production growth in the near term and the policy responses from central banks.
Kuwait’s national OPEC representative Mohammad al-Shatti also tweeted Wednesday: “The market free fall is all about economy and nothing about supply, so producers can not do any thing about it to stop the fall.”
S&P Global Platts Analytics believes fundamentals suggest Brent prices should be much stronger, but notes oil markets are waiting for clear signals that fundamentals are tightening and the global economy is stabilizing.
OPEC is scheduled to meet on December 5 and with non-OPEC on December 6.