Just as the world is battling with inflation, higher for longer, or recession, whether there is one or not, Saudi Arabia decides to create more volatility by extending their already announced 1 mbpd oil production cut from earlier to the end of September. Brent oil prices have now rallied from $72/bbl. to north of $80/bbl. since the June lows, as OPEC, namely Saudi Arabia, keeps using “market stability and price support” as justification for carrying out their cuts.
In layman’s terms, the Saudis just want to see oil prices nudge back up towards $90/bbl. and higher as that is what they need to support their growth ambitions. We all know that is their agenda, despite denials using “suppressing volatility” as rationale. If that was really the case then why is it they are so slow to bring back all those cuts? They waited a good two years to do so after their first cut of 10 mbpd in April 2020.
A slight refresher for those who have joined the oil market late. Prior to the Covid demand collapse in 2020, oil was happily trading around $45-$65/bbl. for years — at least until Saudi Arabia and Russia decided to call a truce. The Trump-brokered deal at the time was great for oil prices as it took them from -$36/bbl. all the way to $70/bbl. before the Russian invasion of Ukraine.
There was never any shortage of oil, but given the war dynamics, things became tight very fast, sponsored by the demand surge fueled by central banks’ Covid-related stimulus. As things normalized, however, prices fell, but Saudi Arabia was not happy. So, it decided to cut barrels to “tighten” the market, providing a floor.
All this did, though, was create a shortage in medium/heavy sour oil vs. sweet oil. This is causing havoc in light heavy spreads, which also distorts refining yields of diesel, where the “tightness” was earlier in the year. Saudi Arabia, knowing this, wants to artificially tighten the diesel market so that crude can move higher as refining is the potential bottleneck. Cheeky?
Looking at July import data, Europe’s imports were estimated at 8.72 million metric tons in July, down from June’s 9.06 million and the lowest monthly total since August last year. Asia’s imports were estimated at 21.85 million metric tons in July by commodity analysts Kpler, up from June’s 21.28 million and the most since January.
Europe is slowing down and most of China’s “apparent demand” went into storage, so China is storing oil especially when it was at lows. Those waiting for a Chinese recovery may be waiting a bit longer as there is none. China and India keep buying cheap Russian oil and while the Western nations pat themselves on the back regarding Russian sanctions, the global supply chains have shifted forever and Russia is actually doing much better than before the war.
When we came into this year, most had expected a recession/slowdown in the first half to be followed by a recovery in the second half. However, things have reversed as the first half was much better than feared. Oil prices have not kept up with the rebound in other commodities as lost volumes from them have been compensated by higher volumes from Russia, Iran and Venezuela.
Saudi Arabia is buying time until a recovery is seen. This dubious logic suggests that they are not aware of past liquidity cycles or the Fed’s mandate. They are working against the Fed, which is hell-bent on getting inflation down to 2% and will not cut rates till economy really needs it and they reach that goal.
In the meantime, all Saudi Arabia is really doing is keeping the core CPI higher for longer, which means broader equity markets will suffer from higher for longer rates, which will kill demand for oil even more.
There is a reason why we say “Don’t fight the Fed.” Perhaps Saudi Arabia should adhere to that as well.
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