Saudi output cut unlikely to lift oil prices to high $80s-low $90s, Citi says
Top crude exporter Saudi Arabia’s one million barrel per day (bpd) oil output cut is unlikely to underpin a “sustainable price increase” into the high $80s-low $90s with weak fundamentals pointing to lower prices by year-end, Citi analysts said in a note on Tuesday. Brent gained as much as $2.60 on Monday after Saudi Arabia, OPEC’s de facto leader, said its output would drop by 1 million bpd to 9 million bpd in July. However, oil prices came off those gains to edge lower on Tuesday. “We see average quarterly prices fairly range-bound for the year, averaging $81 for Brent in both H1 and H2 but with the potential to range between $72 and $90,” Citi said in the note. Citi analysts cited factors such as weaker demand and stronger non-OPEC supply by year-end, potential recessions in the U.S. and Europe, and lower growth in China which could see prices end up lower rather than higher this year and in 2024. OPEC+, which groups the Organization of the Petroleum Exporting Countries and allies led by Russia, currently has cuts of 3.66 million bpd in place, amounting to 3.6% of global demand, to limit supply into 2024 as the group seeks to boost flagging oil prices. But “it would take surprisingly better coordinated action among OPEC+ producers to tighten markets… The likelihood that Saudi Arabia would tackle this on its own on a sustained basis is quite low,” Citi said. Citi said if Saudi Arabia kept production at 9 million bpd throughout the third quarter of this year, the deficit during the period would widen to above 1 million bpd and leave global oil markets finely balanced in 2023 – however, markets would still face a large surplus in 2024. Other analysts said a global shortfall in supply is set to deepen in the third quarter following the kingdom’s output cuts and could push Brent towards $100 a barrel by year-end.
Saudi Oil Output Cut Unlikely To Hurt India As Russia Leaps Ahead
Saudi Arabia’s decision to further cut crude output is unlikely to hurt India as Russia, with its discounted oil, has trumped all other nations to emerge the largest supplier with 42% share in India’s fuel imports. The cheap Russian supply in May scaled another record and is now more than the combined oil bought from Saudi Arabia, Iraq, UAE and the U.S., PTI reported citing data from energy cargo tracker Vortexa. India took 1.96 million barrels a day from Russia in May, 15% higher than April. The additional supply cut of one-million barrels a day from July by Saudi Arabia will not lead to any substantial impact as India has an extraordinarily good pricing deal from Russia, according to Ashwin Jacob, partner Deloitte India. “The price increase in coming months will be compensated by the Russian discounts to large extent.” The impact on India will be minimal,” Jacob said. In FY23, barring Russia, crude imports from all other geographies including Saudi Arabia, Iraq, UAE, US, and others countries, fell. “In 2022-23, there was a change in the sources of India’s crude imports. Russia’s share in India’s crude imports soared to 19.1 per cent from 2.0 per cent a year ago,” the Reserve Bank of India said in its FY23 annual report. India imported 232.73 million tonnes of crude in FY23, an increase of 9.58% year-on-year, according to Petroleum Planning & Analysis data. The increase in value terms was 37% year-on-year to $157 billion. According to Director General of Commercial Intelligence and Statistics, India imported Petroleum Crude worth $162.2 billion and petroleum products worth $47.21 billion in FY23. It exported petroleum products worth $97.4 billion in FY23. Kotak Securities, in a report said, markets are likely to tilt into a deficit in the second half of 2023, if Chinese demand recovery materialises. “With rising odds of a Federal Reseve pause in June coupled with tightening supplies, we might see oil prices trading with an upside momentum.”
Oil Prices Fall Back After A Short-Lived OPEC+ Rally
This Monday saw what was perhaps one of the shortest oil price rallies following an OPEC+ meeting. The announcement of an additional production cut of around 800,000 bpd by the oil-producing group pushed Brent crude and West Texas Intermediate slightly higher during the day but by Tuesday morning the momentum had fizzled out and both key benchmarks were down. At the time of writing, Brent crude was trading at $76.52 per barrel, with West Texas Intermediate at $71.93 per barrel, both down, although by less than half a percentage point from yesterday. During the Monday session, Brent crude added some $2.60 per barrel and WTI jumped by over $3 per barrel. It appears that traders are unconvinced about the importance of any further cuts from OPEC+ as worry about the state of the global economy prevails. On Sunday, Saudi Arabia announced that it would implement voluntary cuts of 1 million bpd but the UAE was allowed to raise its output by about 200,000 bpd. “Supply side issues took centre stage following OPEC’s production cuts. However, the gains were limited amid ongoing concerns over the economic backdrop,” analysts from ANZ said in a note cited by Reuters earlier today. On the other hand, “the U.S. economy is about to show a very robust summer travel season that should mean gasoline and jet fuel demand is going to be very strong,” according to Edward Moya from OANDA, also cited by Reuters. According to U.S. manufacturing sector data, the industry has been shrinking for seven months in a row, which fits in with the definition of a recession, which has dampened demand for fuels and reinforced a bearish sentiment among oil traders. On the other hand, summer driving season is peak demand season and with prices at the pump much lower than they were this time last year, it could live up to its name, possibly changing traders’ sentiment.