The world’s largest oil producing group says demand is steady and will get better through 2024. But the biggest exporter within the cartel is so afraid of lower prices for crude that it has to artificially suppress supply with draconian production cuts.
For years, there’s been a disconnect in the messaging between the monthly reports of the Organization of the Petroleum Exporting Countries, or OPEC, and the production of its principal co-founder Saudi Arabia — which practically makes all decisions for the 13-member cartel.
OPEC’s monthly outlook on supply-demand is written, arguably, with one primary objective: Getting a higher price per barrel for crude.
Thus, OPEC’s outlook alternates between scenarios of high demand and softer ones. The more positive its outlook, the greater the potential for higher crude prices — and vice-versa, of course.
When demand looks suspect, it’s logical for oil producers to calibrate supply accordingly and no one would blame the Saudis and others within the group for making production cuts.
The problem though is when demand is perceived to be good or at least steady. Adding to production cuts at that time, using the fiction of oversupply, makes a joke of OPEC’s outlook — particularly when the group is suggesting the opposite about oil consumption.
Thus was the case with the August outlook of OPEC, released two days prior to this article. The group maintained its outlook from July that global oil demand will grow by 2.44 million barrels per day this year and by 2.25 million in 2024.
The Saudis, on the contrary, announced a million-barrel per day cut for July and August. Then, a few days into this month, just before a monthly meeting of OPEC+ — which bands OPEC’s 13 core members with 10 oil producing allies steered by Russia — the Saudis said the million-barrel-per-day cut will prevail through September.
'Deeper' Oil Cuts Could Be Coming
What’s more, the statement from the Saudi Press Agency citing the energy ministry had an important clause saying forthcoming production cuts “can be … extended and deepened”.
There’s only one reason for the Saudis to make such a threat: To maximize prices for a barrel by creating panic about impending supply and to scare short-sellers from creating a bear market for oil (an attempt the kingdom has interestingly failed at in the past, not for the lack of trying).
“Clearly, if what OPEC says about demand is true, there’s no reason for the Saudis to continue reducing production at the pace they’ve been doing, let alone warn about deeper impending cuts,” said John Kilduff, partner at New York energy hedge fund Again Capital. “The Saudi actions clearly demonstrate their fear that global oil demand is not as hunky-dory as OPEC makes it out to be in its latest monthly report.”
Kilduff’s comments underscore latest data out of China shows that crude oil imports fell 2.412 million barrels per day month-on-month to a sixth-month low of 10.429 million barrels daily as stockpiling wanes in the world’s largest oil importer.
Meanwhile, in India, the world’s third largest oil consumer, demand for crude imports in July clocked in at 4.7 million barrels daily, weaker than Wall Street’s expectations of 4.83 million. Year-on-year demand growth for oil in India also slowed from 190,000 barrels per day in June to 84,000 in July.
The Paris-based International Energy Agency said in its own outlook released a day after OPEC’s that global oil supply plunged by 910,000 barrels per day in July in part due to a sharp reduction in Saudi output.
But Russian oil exports appeared to have held steady at around 7.3 million barrels daily in July, the so-called IEA said, once again disproving the Kremlin’s account that it was adding meaningfully to Saudi production cuts. If anything, the Russians have exported far more oil this year than they’ve told the Saudis — and anyone else who believed them.
Oil money is critical to fund the Kremlin’s war machine against Ukraine, which it invaded 18 months ago and has yet to acquire. Also, until lately, Russian crude exports have been $10-$15 per barrel lower than the price of global crude benchmark Brent due to a G7 price cap. The undercutting of official prices by the Russians had also frustrated Saudi efforts to get the global market for oil higher.
Consumer Idea of Oil Demand Is More Modest
The IEA estimated that global oil demand hit a record 103 million barrels per day in June and could scale another peak in August. Even so, the IEA's demand growth forecast is down by 150,000 barrels per day from last month. The agency, which looks out for the welfare of global oil consumers, appears to have a better pulse of world growth conditions as it cites economic projections by the OECD, or Organisation for Economic Co-operation and Development, which groups 38 countries. OPEC cites OECD oil demand but does delve into that bloc’s economic forecasts, thus doing little justification to its 2023 and 2024 forecasts.
"The global economic outlook remains challenging in the face of soaring interest rates and tighter bank credit, squeezing businesses that are already having to cope with sluggish manufacturing and trade," the IEA said.
For 2023, the Paris-based agency sees only a 2.2-million-barrel-per-day growth versus OPEC’s forecast expansion of 2.44 million.
On a daily basis, demand for this year is forecast to average 102.2 million barrels, the IEA said, with China accounting for more than 70% of growth, despite concerns about the economic health of the world's top oil importer.
For 2024, the IEA forecast world demand growth for oil to slow sharply to 1 million barrels per day, citing lackluster macroeconomic conditions, a post-pandemic recovery running out of steam and the burgeoning use of electric vehicles.
"With the post-pandemic rebound largely completed and as multiple headwinds challenge the OECD's outlook, oil consumption gains slow markedly," the agency added.
So, why is OPEC maintaining such a rosy demand for oil outlook even as the Saudis think more and more cuts are needed to “balance” the market?
Both, as I outlined earlier, are trying to get crude prices up, most likely to $100 a barrel and beyond, regardless of the inflationary and other negative impact that could have on the world economy.
At around $88 per barrel for Brent and just under $84 for U.S. crude at the time of writing, the Saudi mission isn’t too far away, though, as I also stated earlier, keeping the market at those levels has never been easy for the kingdom, which cannot be faulted for lack of trying.
In fact, the “balanced market” phrase for oil is used most creatively by the Saudis and the rest of OPEC. The term balance, in Saudi/OPEC think, has nothing to do with the supply/demand balance of oil, which in the perfect world would be 1:1. No, in Saudi/OPEC parlance, the oil market is regarded as balanced when crude prices are close to, at or beyond $100 a barrel. If consumers can buy oil at affordable levels, the market is terribly lopsided — that’s Saudi/OPEC logic.
Saudi Mistakes the World Must Pay For
In his book on “The New Global Oil Market Order And How To Trade It”, Simon Watkins says that since the creation of OPEC in September 1960, the cartel’s main aim – and that of its successor OPEC+ - has been to “keep oil prices as high as possible for as long as possible, without jeopardizing its relationships with core clients and/or geopolitical sponsors.”
Watkins says Saudi Arabia, particularly, needs oil prices as high as possible because the kingdom was still suffering from the deep structural financial damage it incurred during the 2014-2016 price wars that it started to kill the advent of the U.S. fracking boom that flooded the world with cheap crude.
Watkins says in basic terms, Saudi Arabia moved from a budget surplus before the 2014-2016 oil price war to a then-record high deficit of $98 billion in 2015. It also spent at least $250 billion of its precious foreign exchange reserves in that period that even senior Saudis said was lost forever. Says Watkins:
“The need to plug at least part of these huge losses led to the idea of floating part of Saudi Arabia’s corporate crown jewel – Aramco (TADAWUL:2222). However, so toxic was the investment environment the Kingdom had created with the 2014-2016 War that it had to guarantee to pay crippling dividends on Aramco shares to induce anyone to buy them.”
Ultimately, Saudi Arabia was left with having to pay out dividends to shareholders of $18.75 billion every single quarter of every single year – a total of $75 billion each year, he said. “In other words, Aramco was left to pay out every year around three times the entire amount that it received for the entire IPO in the first place.”
The 2014-2016 price wars were followed up with a brief but still costly showdown in 2020 with Russia that erupted during the COVID-19 outbreak, said Watkins. In that episode, the Saudis destroyed vast capacities of American oil drilling by creating a global supply glut that sent U.S. crude to minus $40 a barrel at one point.
Now, in his new adventure to remake the Saudi economy, Crown Prince and future king Mohammed bin Salman is eyeing a $7 trillion bill. The Vision 2030 plan is centered around a futuristic work-play-and-live hub called NEOM. The seemingly noble plan mooted five years ago is today high in grandiosity and low on delivery, say consultants brought to work on the project. And the Saudis expect the rest of the world to pay for that through the price per barrel of oil.
“Saudi Arabia needs oil prices to be high enough not just to cover the appalling financial legacy of its disastrous oil price wars but also to bankroll the vast array of socio-economic projects required to keep its royal family in power,” Watkins adds.
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Disclaimer: The content of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.