Saudi Arabia squeezes oil market: ‘The Fed may have to react’

As crude prices surge above $90 a barrel, leaders of Saudi Arabia and Russia speak on the phone congratulate each other If this job is done well, oil consumers should take note.

After half a year of slump, prices for the world’s most important commodity are rising sharply as the largest players in OPEC+ work carefully to ensure supply does not exceed demand. Saudi Arabia initially pledged to cut production by 1 million barrels per day in July only, which will now last until the end of the year, while Russia has also made smaller export cuts.

It’s not just the scale of the supply shortage that could result that should worry consumers – it was about 2.7 million barrels per day in the fourth quarter, according to Rystad Energy A/S. Indeed, Riyadh, the West’s somewhat estranged ally, and Moscow, its outright enemy, are now closely linked in their push for higher prices.

Greg Sharenow, managing director at Pacific Investment Management Co., said: “The crude squeeze seems quite reasonable and real. It will definitely keep the oil market boiling.”

Just as consumption is surging, Saudi Arabia is squeezing the market. According to the International Energy Agency, global oil use reached a record 103 million barrels per day in June. The following month, the country cut output to a two-year low of about 9 million barrels per day.

Russia’s additional production cuts are less than a third the size of Riyadh’s and apply to exports rather than production, but their combined effect forces consumers to reduce inventories to meet demand, pushing up prices.

Brent crude, the international crude benchmark, has risen about 20% since July 1. The price of diesel, a vital fuel that keeps the global economy running, has risen by a third in New York.

This summer’s surge in fuel costs has provided Russia with additional funds to fight its war in Ukraine and more cash for Saudi Arabia’s investment priorities. It also threatens a fragile global economy with a new surge in inflation that could undermine central bankers’ plans to ease their rate-hiking cycle.

It had been hoped that the seasonal change would ease tensions in the oil market. Forecasts from the Paris-based International Energy Agency (IEA), which advises major economies on energy policy, show a fourth-quarter supply deficit of just over 1 million barrels a day, just short of the estimated July-September gap. half of.

A joint statement from Saudi Arabia and Russia on Tuesday significantly changed that outlook, making the estimated deficit in the final quarter as severe as in the summer. Oslo consultancy Rystad Energy said this means global oil prices will be higher.

“Our supply and demand models point to a significant deficit,” said Emily Ashford, commodities analyst at Standard Chartered Bank. “Saudi Arabia’s production cuts have a bigger impact than those claimed elsewhere – when they say they are going to do it. When they do, they really mean it.”

supply options

So what chance does the world have of avoiding a damaging oil price spike?

When Saudi Arabia announced an extension of its production cuts, it did say it would review the decision monthly and could increase output if necessary. But Saudi watchers say consumers should not expect the kingdom to change its mind this year.

“Riyadh is pleased with its market management and prices,” said Raad Alkadiri, managing director of energy, climate and resources at Eurasia Group. “Given the continued uncertainty over Chinese demand, it is unlikely that supply will be relaxed this year and Exposed to risk of falling prices.”

OPEC has other potential sources of additional supply, but they all face numerous obstacles.

Iraq’s output could rise by 400,000 to 500,000 barrels a day if it can resolve a three-way legal dispute with its semi-autonomous Kurdish region and the Turkish government, which has shut down key export pipelines. However, after six months of negotiations, a solution remains elusive.

Iran has Promote production Its exports may have reached their peak this year despite easing U.S. sanctions.

“The White House has allowed more Iranian oil to enter the market as part of a diplomatic deal,” said Helima Croft, global head of commodities strategy at RBC Capital Markets. “With Iran already close to pre-sanctions production levels, the issue It’s how much Iran has left in its tank.”

consumer choice

U.S. President Joe Biden, who is running for re-election next year, has another potential tool to curb oil prices – the Strategic Petroleum Reserve. Last year, its resources were vigorously exploited, with a historic decline of about 180 million barrels. However, when crude oil prices fell earlier this year, the replenishment process began.

In theory, the Department of Energy said it could still conduct competitive sales, award contracts and prepare to begin deliveries within 13 days of the president’s order to utilize the SPR. in fact It may take longer due to aging facilities and pipes. The current replenishment program is expected to take several years to complete.

On the consumer side of the supply and demand equation, the best prospects for avoiding a spike in oil prices may lie with China. The country’s economic downturn has weighed on prices for much of this year, small logo Despite Beijing’s efforts to stimulate growth, the economy will undergo a major shift.

The supply deficit will also narrow in the fourth quarter if oil demand from the world’s largest importer is much lower than expected. Rystad said China’s macroeconomic sentiment is a potential downside risk, but the latest liquidity indicators do not point to an imminent slowdown.

Energy Aspects Ltd. analysts including Amrita Sen and Jianan Sun were more forthright when talking about their first visits to China since the pandemic.

“The West’s perception of Asia, and China in particular, is far from reality,” they said in a report. “End-user demand and refinery operations are strong, and every Chinese energy company we met noted that oil demand has increased with The economic data is completely decoupled.”

After months of cheap crude helping to combat inflation, consumers are facing a new market paradigm.

“Oil prices have reached levels that will affect overall inflation,” said Christopher Rule, an adjunct senior research scholar at Columbia University’s Center for Global Energy Policy. “It’s not just something Biden doesn’t like, but it’s something the Fed may have to do. A reaction thing.”

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