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Something Strange Is Happening In The Saudi Oil Patch

According to Bloomberg, Saudi Arabia…

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Why Saudi Oil Production Suddenly Dropped

Oil prices jumped on Monday…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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IEA Pours Cold Water On Oil Price Rally

Permian oil rig

Just as oil prices really started to pick up steam, the IEA had to spoil the party. The Paris-based energy agency said on Tuesday that the oil market will remain in a state of oversupply through the first half of 2017, and in fact, there are some worrying signs for oil prices in the near-term.

The IEA lowered its oil demand forecast once again, dropping demand growth for 2016 to 1.2 million barrels per day. In September it expected growth of 1.3 mb/d, which in turn was down from the 1.4 mb/d estimate in August. Two consecutive months of downgrades to its demand figures come as the agency sees “vanishing OECD growth and a marked deceleration in China.”

The development is all the more surprising because low fuel prices were expected to stoke demand. That did happen in the early phase of the current oil price downturn – in the third quarter of 2015 demand grew at its fastest rate in five years at 2.5 mb/d, as motorists and industry around the world burned through cheap fuel. But demand growth has screeched to a halt, largely due to a slowdown in China. The third quarter of 2016 saw crude oil demand grow at a four-year low of 0.8 mb/d on an annualized basis.

Slowing demand is a major problem for oil prices, particularly because the OPEC-fueled rally may not have a lot more room to run. Oil prices are up roughly 15 percent since OPEC said that it would cut production by 200,000 to 700,000 barrels per day. But the IEA warned that ongoing production gains from other OPEC members could more than offset those cuts. In September, OPEC’s collective output rose to 33.64 mb/d, an all-time record. Iraq added 90,000 barrels per day; Libya added about 70,000 bpd; Nigeria brought back 20,000 bpd; Iran added a modest 30,000 bpd. Much more oil could be forthcoming from some of those nations, particularly Nigeria and Libya, if damaged infrastructure can be repaired and brought back online. Related: Iran, Iraq Bow Out Of Next OPEC Meeting

That comes on top of the near record levels of production from the larger OPEC producers, including Saudi Arabia, the UAE and Kuwait. OPEC is now producing above 33.6 mb/d, which means that in order to lower output even to the higher end of the stated range that OPEC is targeting (33.0 mb/d), the cartel will need to come up with at least 600,000 barrels per day of cuts. Because Libya, Iran and Nigeria are exempt from the planned cuts, the reductions will have to come from elsewhere. Saudi Arabia is the only country with the wherewithal to seriously cutback on output. To be sure, Riyadh was already planning reductions following peak summer demand season, but the steadily rising output levels from fellow OPEC members might test the country’s resolve.

The WSJ reported last week that Saudi Arabia’s powerful Deputy Crown Prince authorized his energy minister to negotiate a production cut with OPEC, but only for volumes that the Kingdom had planned on cutting anyway. In other words, Saudi Arabia was willing to agree to coordinated cuts, but it was not abandoning its strategy of pursuing market share. It was simply repackaging its planned cutbacks as part of an OPEC production cut deal. That suggests that Saudi Arabia may not be willing to cut more than 400,000 barrels per day or so, which would bring it back in line with its spring production levels. But at this point, the Prince does not appear willing to bend any further. Related: Trump And Hillary On Energy: All Noise, No Substance

With OPEC producing at 33.6 mb/d, and the group needing to find at least 600,000 bpd in cuts just to get it to the high end of its announced range, there is good reason for skepticism about members being able to come to terms.

That takes us back to glut of oil that continues to plague the market, as the IEA laid out in its report. OPEC’s “record-smashing performance” this year, combined with much weaker-than-expected demand, points (once again) to a lower-for-longer scenario for crude prices. “Left to its own devices,” the IEA says, the oil market “may remain in oversupply through the first half of next year.” OPEC is trying to correct the imbalances, but it faces an uphill battle in trying to reach a deal that actually produces a substantial impact on global supplies.

By Nick Cunningham of Oilprice.com

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