“It’s not about . . . jacking up prices, it’s about making the decisions that are right when we have the data,” he said (“Saudi Arabia’s energy minister says oil cuts not about jacking up prices”, Financial Times, Sept. 18).
Energy Minister Prince Abdulaziz bin Salman cited continued uncertainty about oil consumption in China, the manufacturing slump in Europe, and the course of inflation and interest rates in North America and Europe.
Dismissing forecasts that the crude market will experience a large deficit in the fourth quarter, he noted supply and demand forecasts are not always reliable (“Saudi energy minister says OPEC⁺ cuts were needed to stabilize oil market”, Reuters, Sept. 18).
“It’s always better to go by my motto, which is, ‘I believe it when I see it.’ When reality comes around as it’s been forecast, Hallelujah, we can produce more.”
He also criticised forecasts published by the International Energy Agency (IEA). “They have moved from being a forecaster and assessor of the market to one practicing political advocacy.”
But the IEA is not the only forecaster expecting a significant depletion of inventories already well below the long-term seasonal average.
The very strong backwardation in futures contracts over the next six months implies the majority of oil traders share this view.
Chartbook: Brent prices and spreads
The extra production cuts announced by Saudi Arabia and Russia will have removed a total of 125 million barrels of crude from the market by the end of September and 245 million by the end of December, if implemented in full.
At the same time, the economic outlook in the U.S. has improved, with faster growth, slower inflation and the prospect the central bank will end or at least pause its campaign of interest rate rises.
Slower oil production and faster consumption have combined to transform the outlook for inventories, prices and calendar spreads:
* U.S. commercial crude inventories, the most visible part of the global market, have fallen in seven of the most recent ten weeks, by a total of 32 million barrels since the end of June.
* Front-month Brent futures prices have averaged more than $91 per barrel (59th percentile for all months since 2000) so far in September, up from $75 (41st percentile) in June, after adjusting for inflation.
* Brent’s six-month calendar spread has tightened into a backwardation averaging $4.50 per barrel (94th percentile) in September from $1.33 (53rd percentile) in June.
Relative contributions from production cuts and faster economic growth are impossible to establish with any certainty.
But given the large cut in production and the modest upgrade in economic forecasts, it is reasonable to assume output cuts have accounted for more than half of the increase in prices and spreads.
Even after the rise in crude prices, however, they remain moderate compared with periods of high prices in 2007-2008 and 2011-2014 once inflation is taken into account.
In real terms, monthly prices would have to average $110 per barrel to be in the 75th percentile for all months since 2000, and $146 to reach the 90th percentile.
From a producer perspective, real prices are not very high yet, and there may be scope to raise them further without a negative impact on consumption and revenues.
– Oil prices surge as stocks drain away from Cushing (Sept. 15, 2023)
– Depleting U.S. crude stocks draw in hedge funds (Sept. 11, 2023)
– Depleting U.S. crude inventories lift oil prices (Aug. 31, 2023)
John Kemp is a Reuters market analyst. The views expressed are his own
(Editing by Jan Harvey)