Saudi Arabia's New Oil Price Target: A Warning to OPEC Cut-Violators
Reports have emerged that Saudi Arabia, OPEC's largest oil producer, is rumored to be accelerating the unwinding of its oil production cuts, causing a reversal in the oil price rally. The Brent forward curve has taken a winding path in September, moving from significant backwardation at the end of August to a flat position on 10 September, followed by a gradual recovery and steepening up to 24 September, then another flattening.
Bearish Oil Futures Market
The oil futures markets remain strongly bearish. A few days ago, the Wall Street Journal reported that the number of short positions held by money managers in Brent futures has exceeded the number of longs for the first time on record. This is due to the prospect of more OPEC+ crude hitting the markets in the near future.
Saudi Arabia's Unofficial Price Target
Last week, the Financial Times reported that Saudi Arabia was prepared to abandon its unofficial price target of $100 a barrel for crude oil as it gets ready to increase output. This indicates that the country is resigned to a prolonged period of lower oil prices.
Unwinding Production Cuts
Previously, Saudi Arabia and seven other OPEC+ members were due to unwind long-standing production cuts from the start of October. However, a two-month delay sparked speculation over the timing of the production increase, with Brent prices dropping below $70 per barrel on renewed demand fears and a weak Chinese economy. The kingdom is now committed to bringing back that production as planned on December 1, regardless of market conditions and oil prices at the time. This is an effort to avoid losing more market share to non-OPEC producers, including the United States.
OPEC's Denial
Despite these rumors, OPEC denied earlier this week that it had a new price target. However, the rumors are worrisome for oil markets given the significant role Saudi Arabia plays as OPEC’s key swing producer. The country currently accounts for 2 mb/d out of 2.8 mb/d output cuts from OPEC members and a total of 3.15 from OPEC+.
Standard Chartered's View
Commodity analysts at Standard Chartered have taken a more nuanced view of the situation. They argue that Saudi Arabia's 84 thousand barrels per day (kb/d) output increase each month starting December 2024 does not necessarily mean that the Kingdom has changed policy and is aiming for market share. They suggest that Saudi Arabia is sending a warning that it will accelerate the phasing out of voluntary cuts unless all partners involved fulfill their pledges.
Compliance with Pledges
Compliance with pledges will be key in determining whether oil markets remain tight or not. Back in July, Russia, Iraq, and Kazakhstan submitted their compensation plans to the OPEC Secretariat for overproduced crude volumes for the first six months of 2024. According to OPEC, the entire over-produced volumes will be fully compensated for over the next 15 months through September 2025.
Budget Deficit
Saudi Arabia is facing a significant budget deficit at current oil prices. After enjoying a rare budget surplus in 2022, most Gulf Cooperation Council (GCC) economies are seeing their budget deficits widen with current oil prices still well below what they require to balance their budgets. According to the IMF, Saudi Arabia, the GCC’s biggest economy, needs an oil price of $96.20 per barrel to balance its books.
Alternative Funding Options
Despite the deficit, Saudi Arabia believes it has enough alternative funding options to weather a period of lower prices, including tapping foreign exchange reserves or issuing sovereign debt.
Bottom Line
In conclusion, oil markets will have to wait before deciding to call Saudi Arabia’s bluff. The Covid-era oil crisis and oil price crash have disciplined many producers in OPEC+. It’s unlikely they will be willing to engage in another race to the bottom by flooding the markets with oil. What do you think about this situation? Share your thoughts with your friends and sign up for the Daily Briefing, which is everyday at 6pm.
