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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Saudis To Take ‘Significant’ Measures To Bolster Oil Prices

Refinery

At the meeting of OPEC and non-OPEC producers in St. Petersburg on Monday, Saudi Arabia announced its intention to take further action to bolster flagging oil prices. Saudi oil minister Khaled al-Falih declared Saudi oil exports would be limited to 6.6 million bpd, a decline of almost a million bpd from the country’s export level last year.

The oil minister reported that global inventories had fallen by 90 million barrels, crediting the OPEC production cuts. Yet he also said that stocks remained at historically-high levels and additional action by producers would be needed for levels to recede.

Prices rose as a result of the Saudi declaration, with WTI rising past $46 and Brent nearly $49 after the news broke.

The vow to cut additional production is an indication that the Saudi strategy to reduce global production, cut into historically-high inventories and raise world prices, has not succeeded as they hoped. Cuts by OPEC members have been offset by increases in U.S. production as well as OPEC members like Libya and Nigeria, which are exempt from formal cuts.

As OPEC’s largest producer and the world’s largest oil exporter, Saudi Arabia has taken some significant measures to rescue prices, after letting them languish amidst over-production between 2014 and 2016.

Recently, Riyadh cut exports to the United States in a bid to cut into American inventories, which had become noticeably bloated due to high U.S. production. According to the EIA, American imports from Saudi Arabia averaged 524,000 bpd in mid-July 2017, a fall of more than 300,000 bpd from July 2016. The U.S. has begun importing larger amounts of Iraqi oil as a result of the Saudi cuts.

Related: Why Oil Prices Aren’t Going Anywhere

The Saudi strategy, a public attempt to reduce inventories used by market watchers and traders as a bellwether for global oil demand, has had mixed results. EIA reports indicate that inventories have fallen, as they usually do during the summer driving months.

For the week of July 14, the EIA reported inventories fell by 4.7 million barrels, while gasoline stores fell by 4.4 million barrels, continuing a five-week decline. Both remain in the upper half of average ranges for this time of year.

The Saudi decision to cut additional production later this year comes as OPEC unity begins to fray. Last week Ecuador, a minor OPEC producer, announced it would no longer observe production cuts and would allow its production to rise above its designated cap. The move sent some discomfort through the market, though prices registered little change. OPEC production in July reached a high for the year as compliance with production cuts slipped to 92 percent from 100 percent in May, according to Bloomberg.

As a result of the meeting in St. Petersburg, Riyadh has secured new commitment from Nigeria, a country which has hitherto been exempt from formal production caps. Nigeria has indicated it will maintain a level of 1.8 million bpd, an increase of about 100,000 bpd from its current level.

The Saudis need higher prices by the end of the year, as they prepare for the first IPO of Saudi Aramco, scheduled for early 2018. Higher prices should boost the price of the IPO and bolster confidence in the country’s long-term economic plan, which centers on a gradual transition away from an economy based around oil production and exports.

After weeks of bearish sentiment, the market turned more bullish in late July. Falling U.S. inventories and a downward revision in U.S. production for 2017 (from 10.01 million bpd to 9.9 million bpd, according to the EIA estimate) fueled a bullish turn as hedge fund increased WTI net-long positions. Shorts on WTI slipped and Brent rose briefly above $50 for a few hours before dipping back again.

While the Saudi strategy could eventually trigger the long-sought for price rally, it’s possible the real boost to prices will come from developments entirely separated from Riyadh’s oil policy. The U.S. threat to place sanctions on Venezuela, an OPEC member suffering from massive economic and political instability due to low oil prices, could trigger a collapse in that country’s oil industry. Venezuela ships most of its heavy crude across the Caribbean to refineries in the Gulf of Mexico, which are uniquely equipped to handle the Venezuelan output. Related: Ecuador Abandons The OPEC Deal: Who’s Next?

A U.S. decision to ban Venezuelan imports, which in April 2017 were about 850,000 bpd according to EIA data, would force the country to find new markets for its production while pushing Gulf refiners to search for more heavy crudes. The net effect would likely be a sudden spike in prices.

Venezuela needs higher prices to avoid a complete economic collapse, and has been lobbying OPEC for deeper production cuts. The Saudi declaration to cut additional production could be an acknowledgement of Venezuela’s needs. It’s more likely the Saudis are considering their own problems rather than bowing to the wishes of one of OPEC’s most desperate members.

Either way, the Saudi campaign to reduce production, together with the informal cap to Nigeria’s production and the possibility of disruptions to Venezuela’s exports to the U.S., all indicate higher prices could be around the corner, after months of stagnation.

By Gregory Brew for Oilprice.com

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Leave a comment
  • Josh Gregner on July 25 2017 said:
    Aramco IPO looking more and more desperate, doesn't it? I mean, oil price is down, demand is soft (ref. China over the summer), lacklustre oil demand in the US, US shale booming despite the low oil price and the list goes on. If it wasn't for Venezuela and other small regional conflicts, there would be no silver lining for Aramco at all.

    Worse of all: if Goldman got their peak demand in 2024 right, there is simply no time to extract any money from Aramco: If oil is only up when Aramco doesn't pump - where should the money come from? So who in their right minds would invest in Aramco?!?
  • spin on July 25 2017 said:
    The Saudi's are happy to take unilateral action now because they want to keep the price of oil artificially high before the IPO of Aramco.
  • John Brown on July 25 2017 said:
    This is all crap folks. Every time oil drops well below $50 a barrel we see this propaganda campaign coming from all directions to salvage the price and prop it up. The reality is their is a glut of oil on the market, and an even bigger ocean of oil capacity behind that. This article points out the sheer stupidity of looking at falling oil inventories to prop up prices, because oil inventories are being intentionally manipulated to prop up the price. Their is no reduction of inventories because of any shortage of oil, or higher prices. There is a glut of oil and lower prices which means its a good time to buy and fill inventory. The only reason not to do so is to manipulate the price of oil upward. Nobody is that stupid, but the rest of the industry is in on the game, so they pretend this fake manipulated inventory reduction is a reason to prop up prices. Its amazing how everybody is in on the game.
    Saudi Arabia is the only country actually reducing production, and even that isn't impacting the glut of oil because others despite what they are saying are happy to leap in and sell more.
    There is no reason except collusion for the price of oil to be over $30 a barrel right now, maybe lower, and everybody knows it, but propping it up is fine. That allows the U.S. to continue expanding production and producing more and just adds to the glut.
    Sooner or later everyone is going to realize that there is plenty of oil and natural gas out there, and that OPEC keeping the price higher only causes more capacity to be discovered and more production to come online, and it also helps prop up renewable energy like Wind and Solar which continue to inch up in overall energy market share.
    The facts are that technology has brought us into an era of abundant cheap energy, and less and less of that will be carbon based every year, even as our ability to produce more oil and natural gas continues to improve. Ultimately it will be a good thing, and if the Saudis and OPEC nations are smart they'd better start doing what they should haven been doing the last 30 years. Preparing their economies and people for the day when carbon based energy isn't even a major source of energy, and its going to come faster than anybody thinks.

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