By Andrew Moran
Crude oil soared in price after Saudi Arabia extended its voluntary production cut of 1 million barrels per day (bpd) for another three months until the end of December 2023, state-owned media reported.
As a result of the extension, Saudi Arabia’s output will total 9 million bpd in October, November, and December.
“The source stated that this voluntary cut decision will be reviewed monthly to consider deepening the cut or increasing production,” the Saudi Press Agency reported on Sept. 5.
“The source also noted that this cut is in addition to the voluntary cut previously announced by the kingdom in April 2023, which extends until the end of December 2024.”
October West Texas Intermediate (WTI) crude futures surged as much as 2 percent on the news, firming above $87 a barrel on the New York Mercantile Exchange. Brent, the international benchmark for oil prices, topped $90 a barrel on London’s ICE Futures exchange.
U.S. and Brent are up 8 percent and 5 percent, respectively, year-to-date.
Riyadh first launched its 1 million-barrel-per-day reduction in July as oil prices struggled to stay above $70 per barrel. Officials have asserted for the past year that there was a significant disconnect between paper and physical energy markets. Since then, the kingdom has led the Organization of the Petroleum Exporting Countries (OPEC) and its allies, OPEC+, in voluntary cuts to establish a price floor for oil prices.
Russia also confirmed on Sept. 5 that Moscow will extend its voluntary reduction in crude exports by 300,000 bpd until the year’s end “to maintain stability and balance” in international energy markets.
Deputy Prime Minister Alexander Novak announced that it is trimming output by 500,000 bpd until the end of 2024. The energy powerhouse decreased exports by 500,000 bpd in August and an additional 300,000 bpd in September.
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Industry experts note that these reductions are viewed as voluntary because they do not represent the cartel’s official policy.
Big Trouble in China
The world’s major oil producers might be concerned about China’s continued slowdown, with the latest economic data pointing to anemic growth, which could weigh on energy demand.
In August, the Caixin Services and Composite Purchasing Managers’ Indexes (PMIs) weakened to a lower-than-expected 51.8 and 51.7, respectively—anything above 50 indicates expansion. Both points were the softest since January.
This comes a week after the National Bureau of Statistics (NBS) reported that manufacturing activity contracted for the fifth consecutive month in August.
Despite the slowdown in Beijing, Chinese oil imports have been strong, climbing more than 12 percent year-over-year in the first seven months of 2023, totaling nearly 326 million metric tons. In July, crude imports were up 17 percent from the same time a year ago.
However, there is a growing concern about long-term demand from China, with some asserting that India offers the potential for long-term oil demand growth amid a robust economy.
“China has been supporting the global crude demand for the past 20 years, but in the coming three to five years, China’s demand is going to peak and then it will start to decline. The global market has to look at India or other countries for demand resilience,” FGE Chairman Fereidun Fesharaki told a panel on China, India, and Russia at the Asia Pacific Petroleum Conference (APPC) 2023 organized by S&P Global Commodity Insights.
Kang Wu, global head of demand research at S&P Global, warned that peak oil demand in China will arrive earlier than in India due to the emerging market’s “economic expansions and a young population.”
Meanwhile, a separate report from China’s largest oil company Sinopec, suggests that national gasoline demand might have already peaked because of the adoption of new energy vehicles, rising 38 percent this year, up from 30 percent in 2022.
Oil Markets Feeling Tight
While demand concerns linger throughout the global economy, the data reveal that worldwide oil markets are tightening and will shift into a deficit this month.
“Our balance shows that the market will remain in deficit over 2024,” wrote Warren Patterson, the head of commodities strategy at ING, in a research note.
“However, this deficit is heavily skewed towards the second half of 2024. In fact, we see a small surplus in 1Q24, which suggests that prices could pull back early next year, before moving higher once again.”
ING analysts anticipate more upside in oil prices, with WTI and Brent touching $92 and $88 per barrel in the fourth quarter. They also forecast that WTI and Brent will climb to $93 and $96 in the fourth quarter of next year.
“The assumption behind our 2024 forecasts is that OPEC+ sticks to its planned production targets, whilst the 1.66MMbbls/d of additional voluntary cuts from a handful of OPEC+ producers also continue through 2024,” Mr. Patterson added.
Ben Luckock, co-head of oil trading at Trafigura, explained during an APPC panel discussion that oil is vulnerable to price spikes “because of the long-term underinvestment in new oilfields.”
In the U.S., drilling activity has slowed this year. According to the Baker Hughes Oil Rig Count, the number of active oil rigs has tumbled by about 15 percent since the beginning of the year to 525.
However, the Energy Information Administration’s (EIA) latest Short-Term Energy Outlook (STEO) projects domestic output will increase to 12.76 million bpd in 2023 and 13.09 million bpd in 2024.
The International Energy Agency’s Oil Market Report (OMR) found that global crude supply declined to 100.9 million bpd in July and worldwide inventories fell by 17.3 million barrels in June. At the same time, energy demand is expected to increase by 2.2 million bpd to a record high of 102.2 million bpd by the end of the year, the OMR stated.
This could lead to more pain at the pump, too.
“Refiners are struggling to keep up with demand growth, as the shift to new feedstocks, outages, and high temperatures have forced many operators to run at reduced rates,” the IEA noted. “Tight gasoline and diesel markets have pushed margins to six-month highs.”
According to the American Automobile Association (AAA), the national average for a gallon of gasoline is $3.81, up about 20 percent year-to-date. Diesel prices have risen to their highest levels this year, topping $4.45 per gallon.