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Oil Demand In Doubt As Saudis Extend Production Cuts

Last weekend, Saudi Arabia said it would extend its voluntary production cuts of 1 million barrels daily of crude until the end of the year.

At the same time, the kingdom left its official selling prices for Asia unchanged for deliveries in the last month of the year as refiners' margins weakened.

The two moves have prompted fresh doubts about the outlook for oil demand, with some expecting Saudi Arabia's behavior might indicate uncertainty about it. Oil demand and its future has become one of the great conundrums of our time.

Earlier this week, Saudi Arabia's state energy major Aramco reported a 23% decline in profits for the third quarter, citing lower oil prices and lower sales-the latter a result of the voluntary cuts.

The result was expected, and, in fact, it was better than analysts had predicted. Yet, it did raise doubts about the robustness of oil demand down the road.

Reuters' energy columnist Clyde Russell has become the latest to express these doubts, saying in a column this week that "The extension of the additional 1 million bpd cut is perhaps a tacit admission that crude oil demand isn't as strong as OPEC has been expecting."

It may well be the case that OPEC had overestimated oil demand, yet it is also possible that it is impossible for any player on the oil market to keep stock and hold sway over all the factors influencing prices.

The latest price decline, for instance, is taking place amid weakening doubts about Middle East supply disruption because of the Israel war with Hamas. Initially, the so-called war premium added a few dollars to the benchmarks, but as time passed and no disruption occurred, that premium began to run out of steam. Related: Nigeria Launches New Crude Oil Grade To Boost Exports

Meanwhile, the oil market's fixation with Chinese economic data yielded a result again when Beijing reported a contraction in exports in October. Despite a simultaneous increase in oil imports, the data apparently made traders think China is slowing down. They sold oil.

"The data signals the continued decline in the Chinese economic outlook driven by deteriorating demand in the country's largest export destination: the West," City Index analyst Fiona Cincotta told Reuters this week.

That's an interesting comment, given that on Tuesday, the International Monetary Fund upgraded China's economic growth outlook for both this year and next. The IMF now expects China's GDP to grow by 5.4%, up from 5% in previous forecasts.

As regards demand for oil in the West, the European Union recently held an emergency meeting to discuss the unenviable state of its fuel inventories and the possibility of setting up something like a strategic reserve of diesel. This does not exactly suggest a lower demand for oil and its products but rather a lower-than-desired supply.

At the same time, however, OPEC exports are on the rise, which has pressured prices as it might suggest there is ample supply, quenching fears about a shortage.

"OPEC crude exports are up by about 1 million barrels per day (bpd) since their August low as a result of seasonally lower domestic demand in the Middle East. It seems it is too much supply to be absorbed by oil consuming nations," UBS analyst Giovanni Staunovo told Reuters this week.

It might be more than just supply volumes, though. Chinese refiners are reducing their run rates because of declining margins, but also because the government has not issued additional fuel export quotas, Reuters reported on Monday. Phrased like this, the information suggests there's healthy demand for fuels outside China, but Beijing is keeping the lid on quotas.

The topic of oil demand and its outlook is definitely a fascinating subject of discussion. When the IEA last month predicted it would peak before 2030, it cited the mass adoption of EVs as a primary reason for it. 

In the weeks since then, it has emerged that the makers of these EVs are not exactly optimistic about their electric bet. Lower than expected demand is plaguing the industry, and so are various challenges ranging from higher insurance premiums to insufficient chargers, to weather-dependent performance.

OPEC, meanwhile, continues demonstrating confidence in the health of demand for oil. This is, admittedly, nothing more than what one would expect from an oil-producing club, so in itself, it does not really matter. It does matter in the context of OPEC-and its OPEC+ partners-accounting for about 40% of global oil production.

Maybe Saudi Arabia is worried about demand, and that's why it extended its production cuts. Maybe it was because Riyadh wants even higher oil prices so it can keep building its fantastical $500-billion Neom project. It doesn't matter, however. What matters is that should it want to, Saudi Arabia can remove more barrels from the market if need be.

Such a hypothetical move could send the opposite of the desired message, namely, reinforcing uncertainty about demand, but ultimately, it's the physical and not the futures market where actual demand is revealed as opposed to projections from often biased sources. And if the physical market is tight, prices will go up. Because whether or not it's nearing a peak, right now, oil demand is on its way to another annual record-per the IEA, no less.

By Irina Slav for Oilprice.com

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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More