Saudi-Russia Move Can Only Result in One Thing

In a market update sent to Rigzone, Rystad Energy Senior Vice President Jorge Leon outlined that the extension of Saudi Arabia’s one million barrel per day cut and Russia’s 300,000 barrel per day export cut to the end of the year “significantly tighten the global oil market and can only result in one thing - higher oil prices worldwide”.

“The decisions surprised oil markets, and prices reacted strongly and suddenly following the announcements,” Leon said in the update.

“ICE Brent front month jumped from $88.5 per barrel to over $90.5 per barrel, the highest price since November 2022,” he added.

“We are now predicting global liquids demand will surpass supply by around 2.7 million barrels per day in the fourth quarter of this year,” he continued.

“The big question is: are the Saudis worried about global demand in the final quarter of 2023, particularly in China, so that they need to take preempted measures”, Leon went on to state.

In the update, the Rystad SVP noted that Chinese macroeconomic sentiment is a potential downside risk but added that Rystad’s latest mobility indicators “do not show an imminent deceleration that could justify such a move by Saudi Arabia”.

“The impact these cuts will have on inflation and economic policy in the West is hard to predict, but higher oil prices will only increase the likelihood of more fiscal tightening, especially in the U.S., to curtail inflation,” Leon said in the update.

“Western leaders, wary of an oil price spike, could explore import adjustments or open diplomatic discussions to help mitigate the impact and tame inflation,” he added.

Dylan Hattingh, and Oil and Gas Analyst at Energy Aspects, told Rigzone that Energy Aspects has been “flagging the likelihood that Saudi Arabia would keep the cuts in place through year-end for some time now”.

“However, this announcement has gone further than many in the market had expected, demonstrated by the rally in flat price and spreads,” Hattingh added.

“Market consensus had initially expected that Saudi Arabia would extend the one million barrel per day cut through October, although doubts were starting to creep in as crude prices rose,” he added.

Hattingh noted that the decision to announce a three-month extension rather than just another one-month rollover is intended to show the market that the Kingdom remains absolutely committed to rebalancing the market.

“The official Saudi statement indicates the cuts will be reviewed each month and could be amended. We expect the full one million barrel per day cut will remain in force through December,” he said.

“It is important to remember that even if underlying production in both countries remains flat until December, crude exports will fluctuate month on month due to domestic refinery maintenance and a seasonal reduction in Saudi crude burn,” he added.

Ann Louise Hittle, Wood Mackenzie’s Vice President of Oil Markets, told Rigzone that the Saudi cut alone of one million barrels per day in October-December, if implemented for all three months, would tighten the market into winter, “supporting prices, already in the high $80s, into a range around $90 per barrel to $95 per barrel”. 

“If prices move above $100 per barrel, the Saudis could ease off the full one million barrel per day cut at some point in the fourth quarter,” Hittle added.

“Russia’s production cut, if implemented fully, would add extra pressure on prices,” Hittle continued.

In a report sent to Rigzone late Tuesday, analysts at Standard Chartered said the announcement on September 5 that Saudi Arabia and Russia will extend their additional voluntary production cuts until end-December “pushed prices above $91 per barrel intraday at the time of writing”.

“Carefully worded statements from both countries leave the door open for potential surprises - monthly reviews could either deepen the cuts or increase production,” the analysts said in the report.

The Standard Chartered analysts noted in the report that the year on year fall in prices at the front of the curve has “narrowed sharply to just $4 per barrel” and added that all contracts 18 or more months out are now higher year on year.

“Backwardation has widened as falling inventories are reflected in prompt markets,” the analysts said in the report.

“The first-to-second month Brent spread settled at a year to date high of $0.75 per barrel on  September 4, while the first-to-fourth month spread settled at a nine-month high of $2.12 per barrel. The latter differential had been in contango as recently as end-June,” they added.

In the report, the analysts said the factors that have driven prices higher “have significantly further to run, in our view”.

“The tightening of fundamentals has yet to be fully felt in the consumer market due to transit and other lags,” they said in the report.

“Our supply-demand model shows a flow supply deficit of 2.7 million barrels per day in August and 2.1 million barrels per day in September, neither of which have yet worked through to consumer inventories,” they added.

“We think falling inventories and excess demand in prompt crude markets will insulate H2 crude oil prices from cross-asset macro headlines more effectively than was the case in H1,” they continued.

To contact the author, email andreas.exarheas@rigzone.com