OPEC is producing less oil thanks to the Saudi voluntary cuts and a suspension of crude oil loadings at Nigeria’s Forcados terminal due to a leak risk.
The figures vary depending on the source, but a Reuters survey has suggested the group pumped 840,000 bpd less in July than in June. And they are not showing any signs of reconsidering.
The results are already visible: oil prices are up and rising, with Brent topping $85 per barrel earlier this week while WTI climbed closer to $82 per barrel. The question now is how high they will reach before OPEC begins to roll back the cuts. The other question: will it be able to boost production fast enough if necessary?
Analysts have previously said that Saudi Arabia needs oil at $90 per barrel to continue with its ambitious public spending plans that make up the Vision 2030 diversification program.
Yet if prices are left to climb too high, it would begin to sap demand and have a boomerang effect that neither the Saudis nor their fellow OPEC members would want to experience.
Still, this might be just the beginning of a rally because while Saudi Arabia has been cutting production deliberately, Nigeria and Angola have been unable to produce as much as their OPEC quota states. And Libya’s output has been disrupted yet again while production growth in the U.S. shale patch slows down.
If all the demand projections that have been instrumental in driving this latest rally materialize, this means oil could hit $100 again before the year’s end. That prospect becomes especially plausible in light of reports that crude oil inventories in some parts of the world are on the decline.
Before, global oil and fuel inventory levels did not have much of an impact on international oil prices, but this has now changed because of Western sanctions on Russia, JP Morgan analysts said this week. The reason: more oil and fuels are being traded in currencies other than the U.S. dollar.
With that currency diversification, the level of actual physical supply of the commodities traded has grown in importance as a factor affecting their prices. And demand has now returned to the spotlight of traders.
Both OPEC and the International Energy Agency estimate the annual demand growth pace for 2023 at over 2 million barrels daily. OPEC sees it at 2.4 million bpd. The IEA sees demand growing by 2.2 million bpd, although it has warned oil demand growth will slow “significantly” over the medium term.
The latest import and inventory figures from China confirm the sense of robust oil demand, with the country seen by virtually everyone as the single largest oil demand driver globally. Imports are running at near-record levels, and oil in storage is rising fast. This would also give China leverage over prices if they climb too high, with analysts suggesting that once Beijing becomes uncomfortable with prices, it would start selling crude from storage in what would basically be a repeat of President Biden’s SPR release last year.
It would all depend on how long Saudi Arabia is willing to stick to its voluntary cuts. The latest GDP figures suggest its economy slowed down in the second quarter as oil prices declined. Now that prices are on the rebound, so will probably be the Saudi economy, giving Riyadh good reason to continue capping oil output.
Russia, meanwhile, is drilling for oil at record levels, according to data reported by Bloomberg. The number of new production wells drilled in the first half of the year was 6.6.% higher than planned and 8.6% than the amount drilled over the first half of 2022.
This means potential additional supply that could serve to temper prices the way record Russian oil exports to China helped to temper them earlier this year. With Russia and Saudi Arabia firmly in one camp, however, this supply may well remain potential for as long as the two OPEC+ leaders see fit.