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Why The OPEC+ Output Cut Is Irrelevant

Why The OPEC+ Output Cut Is Irrelevant

Oil demand and oil prices…

Saudis May Cut Oil Prices For Asian Markets

Saudi Riyal

Saudi Arabia may reduce its official selling price for oil for Asian buyers in August, unnamed sources told Reuters, adding the move was prompted by a decline in Middle Eastern benchmarks last month.

A Reuters survey among five refiners revealed the official selling price for the Kingdom’s flagship Arab Light hit a five-year high for deliveries this month, but as benchmarks weaken OSPs have to come down, too. The cut could be of between US$0.30-0.50 per barrel.

“The (official selling) prices need to come down because (spot) prices could drop further next month,” one refiner told Reuters, adding the Dubai benchmark used in pricing cargoes for September loading had fallen since that five-year peak last month.

Saudi Arabia earlier this year increased its OSPs for Asian clients after the U.S. ended the sanction waivers granted to eight Iranian oil importers. Out of options, many refiners in the region were forced to place additional orders for Saudi crude to fill the gap.

However, it was quickly clear this can’t be a long-term strategy as Asian buyers, and particularly China and India, would soon begin to look for cheaper alternatives if Saudi prices remain high. What’s more, benchmarks have proved stubborn in their reluctance to continue climbing up: after a brief spike by about US$2 per barrel on the largely expected news OPEC+ will extend its production cuts, Brent and WTI both retreated.

In addition to the already chronic effect of U.S. production updates on prices, worry about global oil demand is returning, too, and it wiped out a lot of the gains oil had registered yesterday.

“After 2-1/2 years of production cuts, the effects of rolling over production cuts is losing steam,” an analyst from OANDA told Reuters. “The trade war is not likely to get resolved any time soon,” Edward Moya said, “and while central banks globally are expected to deliver fresh stimulus in the coming months, economic activity is continuing to trend lower.”

By Irina Slav for Oilprice.com

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