LONDON, Sept 19 (Reuters) – Saudi Arabia’s oil minister denied that the kingdom’s recent production cuts were aimed at pushing up prices, in a Sept. 18 speech to the World Petroleum Congress in Calgary.
“It’s not about … raising prices, it’s about making the right decisions when we have the data,” he said (“Saudi Energy Minister Saudi Arabia Says Oil Cuts Not Aimed at Raising Prices,” Financial Times, September 18).
Energy Minister Prince Abdulaziz bin Salman cited continued uncertainty over China’s oil consumption, Europe’s slowdown in manufacturing, and changes in inflation and interest rates in America in the North and in Europe.
Dismissing predictions that the crude market would see a significant deficit in the fourth quarter, he noted that supply and demand forecasts are not always reliable (“Saudi energy minister says oil cuts OPEC⁺ were needed to stabilize the oil market,” Reuters, September 18).
“It’s always best to follow my motto, which is: ‘I believe it when I see it.’ When reality presents itself as expected, Hallelujah, we will be able to produce more.”
He also criticized the forecasts published by the International Energy Agency (IEA). “They have moved from being a forecaster and market evaluator to being a policy advocate.”
But the IEA is not the only forecaster to expect a significant depletion of stocks, already well below the long-term seasonal average.
The very strong backwardation in futures contracts over the next six months implies that the majority of oil traders share this view.
Chartbook: Brent prices and spreads
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Additional production cuts announced by Saudi Arabia and Russia will have removed a total of 125 million barrels of crude from the market by the end of September and 245 million by the end of December, if fully implemented.
At the same time, the economic outlook in the United States has improved, with faster growth, slower inflation and the prospect of the central bank ending or at least suspending its interest rate hike campaign.
Slower oil production and faster consumption have combined to transform the outlook for inventories, prices and calendar spreads:
- U.S. commercial crude inventories, the most visible part of the global market, have fallen in seven of the past 10 weeks, by a total of 32 million barrels since the end of June.
- Front-month Brent futures prices have averaged more than $91 per barrel (59th percentile for all months since 2000) so far in September, up from $75 (41st percentile) in June, after adjusting for ‘inflation.
- Brent’s six-month calendar spread narrowed to a backwardation of $4.50 per barrel (94th percentile) in September from $1.33 (53rd percentile) in June.
It is impossible to establish with certainty the relative contributions of production reductions and accelerated economic growth.
But given the sharp reduction in production and the modest improvement in economic forecasts, it is reasonable to assume that production cuts accounted for more than half of the rise in prices and price differentials.
Even after the rise in crude oil prices, however, they remain moderate compared to the periods of high prices of 2007-2008 and 2011-2014, once inflation is taken into account.
In real terms, monthly prices would have to average $110 per barrel to be in the 75th percentile for all months since 2000, and $146 to reach the 90th percentile.
From the producers’ point of view, real prices are not yet very high and it may be possible to increase them further without negative impact on consumption and income.
Related columns:
– Oil prices climb as stocks drain from Cushing (September 15, 2023)
– The depletion of American crude stocks attracts hedge funds (September 11, 2023)
– Depletion of US crude stocks drives up oil prices (August 31, 2023)
John Kemp is a market analyst for Reuters. The opinions expressed are his own
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