Saudi must cap oil to help OPEC

But the King­dom doesn’t want to sur­ren­der Asian mar­ket share

The Hindu Business Line - - COMMODITY WISE - GRANT SMITH

Now is the time to max­imise the impact of OPEC’s oil pro­duc­tion cuts, yet the mar­ket is still wait­ing for the group’s big­gest mem­ber to show it’s do­ing “what­ever it takes” to elim­i­nate the global over­sup­ply.

OPEC’s best chance to make a big dent in the lin­ger­ing glut in the US, and with it re­verse oil’s three-year slump, lies in the remaining weeks of peak sum­mer­time demand.

That’s al­ready be­come harder be­cause of the resur­gence in out­put from OPEC mem­bers ex­empt from cuts, while there are no signs yet that Saudi Ara­bia, the group’s de-facto leader, is will­ing to cut as deeply as it did ear­lier in the year.

“Saudi Ara­bia has gone quiet on the so­lu­tion of ‘what­ever it takes’ to force the mar­ket into re­bal­anc­ing,” said Olivier Jakob, man­ag­ing di­rec­tor at con­sul­tants Petro­ma­trix GmbH in Zug, Switzer­land.

Echo­ing a fa­mous pledge by the Euro­pean Cen­tral Bank, Saudi Ara­bian En­ergy Min­is­ter Khalid al-Falih has re­peat­edly vowed to do what’s nec­es­sary to end the oil rout.

While the king­dom is still cut­ting slightly deeper than re­quired — as it has done all year — it in­creased pro­duc­tion in June to the high­est level since the ac­cord be­gan, boosted ex­ports by even more, and cut prices for Asian buy­ers last week.

Given the cur­rent state of the oil mar­ket, that may not be enough.

Crude sank into bear ter­ri­tory last month amid con­cerns the cut­backs by OPEC, Rus­sia and other al­lies are be­ing par­tially off­set by a re­bound in US shale pro­duc­tion.

There’s also the small mat­ter of a vast in­ven­tory sur­plus built up dur­ing three years of over­sup­ply.

While stock­piles in the in­dus­tri­alised world have fallen, they re­mained 292 million bar­rels above the fiveyear av­er­age in April, ac­cord­ing to the In­ter­na­tional En­ergy Agency.

Step up!

“For some time, we’ve been say­ing OPEC needs to step up,” said Am­rita Sen, chief oil an­a­lyst at En­ergy As­pects Ltd. “Saudi Ara­bia’s ex­ports were up in June, and this is not what the mar­ket wants to see at all. Ex­ports need to come down fur­ther.”

Saudi pro­duc­tion in­creased by 90,000 bar­rels a day to 10.02 million a day in June, ac­cord­ing to a Bloomberg sur­vey. It was the big­gest in­crease in al­most a year and leaves their out­put 150,000 bar­rels a day higher than in Jan­uary, when the king­dom ex­plic­itly cut more than needed as a sym­bol of com­mit­ment to the deal.

While out­put typ­i­cally climbs dur­ing the sum­mer months as crude is burned to meet surg­ing do­mes­tic elec­tric­ity demand for cool­ing, the king­dom’s ex­ports jumped even more, by 320,000 bar­rels a day, ac­cord­ing to ship track­ing by Bloomberg.

Saudi Ara­bia re­duced prices for most of its crude sales to Asia in Au­gust, show­ing that it doesn’t want to sur­ren­der mar­ket share in the re­gion de­spite the com­mit­ment to cut out­put, Sen said.

Keep­ing faith

“I do still be­lieve they mean ‘what­ever it takes’, but the mar­ket is im­pa­tient and wants to see larger stock draws,” said Tor­b­jorn Kjus, at bank DNB ASA. “Saudi ex­ports have been fall­ing and will con­tinue to do so in the third quar­ter,” he said.

“Monthly fluc­tu­a­tions in out­put or ex­ports mat­ter less than over­all com­pli­ance for the du­ra­tion of the deal, which re­mains on track,” said Ja­son Bord­off, di­rec­tor at the Cen­ter on Global En­ergy Policy at Columbia Univer­sity.

Over the first half of the year, the 11 OPEC mem­bers bound by the out­put curbs were fully com­pli­ant with their pledges, the Bloomberg sur­vey showed.

How­ever, a big part of that ef­fort was un­done by the resur­gence of Libya and Nige­ria, OPEC mem­bers ex­empt from the cuts that to­gether have added 440,000 bar­rels a day of pro­duc­tion in the last two months.

This prob­lem was be­com­ing ap­par­ent when OPEC met in Vi­enna in May, but the group went no fur­ther than agree­ing to pro­long the ex­ist­ing cut­backs to March end.


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