Production cuts announced by Saudi Arabia and its OPEC⁺ allies are expected to tighten the global petroleum market moderately over the remainder of 2023 and into the first quarter of 2024.
Commercial inventories of crude oil and refined products in the OECD advanced economies were around 2,821 million barrels at the end of June, according to the U.S. Energy Information Administration (EIA).
Commercial inventories were just -45 million barrels (-2% or -0.25 standard deviations) below the prior 10-year seasonal average (“Short-term energy outlook”, EIA, August 8).
Since then, additional production cuts announced by Saudi Arabia will remove an extra 90 million barrels from the market between July and September.
Russia has also announced extra cuts amounting to 25 million barrels in August and September, assuming they are implemented in full.
Chartbook: Global oil inventories and prices
On the consumption side, traders have become increasingly optimistic about the likelihood the U.S. economy will see a “soft landing,” a scenario in which inflation falls, unemployment remains relatively low and a recession is avoided.
Refined fuel inventories remain well below the long-term average, especially for distillate fuel oils, which should support strong demand from refiners for crude.
But Europe’s manufacturing sector is showing little sign of recovering and China’s manufacturing activity has fallen steadily.
China’s economy was expected to recover strongly over the course of 2023 after the exit wave of the coronavirus pandemic and the lifting of restrictions on movement.
Instead, the recovery has been repeatedly delayed, and now the economy appears to be losing momentum and possibly sliding into a recession.
The net result of output cuts by OPEC⁺, a group comprising the Organization of the Petroleum Exporting Countries and allies including Russia, a soft U.S. economic landing, a struggling European economy, and an increasingly probability of recession in China is that the expected market balance has tightened only modestly since June.
Front-month Brent futures prices have averaged just under $86 per barrel so far in August (69th percentile for all months since the turn of the century, once adjusted for inflation).
Front-month prices have climbed from an inflation-adjusted average of $75 per barrel in June (60th percentile) which is a relatively modest increase.
Brent’s six-month calendar spread has tightened to an average backwardation of $2.72 (78th percentile) so far in August, up from $1.33 (54th percentile) in June.
Much of the impact of Saudi Arabia’s production cuts has been offset, for now, by a deterioration in the global economy outside the United States, with any cyclical recovery postponed until 2024.
Saudi Arabia and its OPEC⁺ allies will likely have to continue with current production cuts through at least the end of the year to protect prices unless there is a significant improvement in the economy in Europe and Asia.
John Kemp is a Reuters market analyst. The views expressed are his own
(Editing by Paul Simao)