The Strategist

Saudi Arabia is trying to keep oil prices from falling

06/27/2019 - 12:20

Saudi Arabia has reduced oil production below its quota and insists on restricting production by other OPEC members, writes The Wall Street Journal (WSJ), citing officials of the kingdom and the cartel. Weaker demand for oil as a result of a slowdown in the global economy leads to a decline in prices, despite the threat of supply disruptions from the Gulf countries.

According to Saudi officials, in May, the country reduced its average daily production by about 150,000 barrels to 9.65 million barrels. The cuts intensified in June, writes the WSJ with reference to OPEC representatives, despite the fact that traditionally the country in the summer pushes production up due to increasing consumption of electricity as a result of the use of air conditioners. As the state is improving energy efficiency, consumption in the domestic market is being reduced, say Saudi officials.

In December 2018, the OPEC + countries agreed to cut production by 1.2 million barrels per day. This helped the price rise from $ 50 at the end of the year to $ 75 per Brent barrel at the end of April. However, since then the price has dropped to $ 60, having collapsed by the end of May by almost $ 10 in just three days. The main reasons were slowdown of the global economy, worsening trade confrontation between the United States and China, which, as expected, failed to agree on settlement of claims in May, and unceasing growth of oil production in the United States. The latter jumped to 12.3 million barrels from 11.7 million barrels in late December, according to the US Energy Information Administration (EIA).

At the next semi-annual OPEC summit, Saudi Arabia will insist on extension of the reduction of production agreement until the end of the year. It will also require to bring production in line with the terms of the agreement, say representatives of the kingdom. This means that countries such as Iraq, Nigeria and a number of others will have to reduce production by 300,000–400,000 bpd, Petroleum Advisor from Saudi Arabia said to WSJ.

Meanwhile, OPEC production in May has already fallen below 30 million barrels per day - for the first time since 2010. It fell by 0.8% to 29.9 million barrels, according to the organization itself, including as a result of a drop in production in Iran due to US sanctions. And in recent weeks there have been several tanker incidents in the Persian Gulf, including explosions on Japanese and Norwegian ships that were bringing fuel from Saudi Arabia and the United Arab Emirates, respectively.

But the problems associated with a slowdown in the global economy, including due to trade wars, outweigh the fear of supply disruptions. The jump in oil prices by 3.5% after the explosions in the Gulf of Oman was short-lived. For market participants, it is more important that China’s oil imports, according to its customs data, fell in May by 8%. EIA reduced its forecast for global oil demand growth in 2019 by 14% compared with the estimate a month ago - up to 1.2 million barrels per day. OPEC itself lowered its daily consumption forecast by 70,000 barrels to 99.86 million barrels a few days earlier. 


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