Rumors of new Saudi oil price target warn OPEC cut violators | OilPrice.com

Oil prices rallied again after rumors surfaced that Saudi Arabia, OPEC's biggest oil producer, was looking to speed up its oil production cuts. The Brent forward curve took a tortuous path in September, moving from a significant backwardation at the end of August to flat on September 10; This was followed by a gradual recovery and steepening until September 24 and then another leveling off.

Oil futures markets remain firmly bearish: 3 days ago, The Wall Street Journal Report Money managers' short positions in Brent futures exceeded longs for the first time on record on the prospect of more OPEC+ crude oil hitting the market in the near future.

Financial Times last week Report That Saudi Arabia was ready to abandon an unofficial price target of $100 per barrel for crude oil as it prepares to ramp up production, effectively signaling that it is resigned to a long period of low oil prices.

Earlier, Saudi Arabia and seven other OPEC+ members were due to lift long-term production cuts from early October. However, the two-month delay has fueled speculation over the timing of production increases, with Brent prices falling below $70 a barrel on fears of renewed demand and a weak Chinese economy. The FT reports that the kingdom is now committed to bringing that output back as planned by Dec. 1, regardless of market conditions and oil prices at that time as the country tries to avoid losing more market share to non-OPEC producers, including the United States.

There are, however, plenty of detractors, including OPEC Denied earlier this week That was a new price target.

Still, the Saudi rumors are certainly worrisome for the oil market as the country continues to play an outside role as OPEC's main swing producer. In fact, Saudi Arabia is currently 2 mb/d out of 2.8 mb/d of output cuts from OPEC members and a total of 3.15 from OPEC+. Essentially, Saudi's contribution is double that of the entire group, with only the Kingdom and Kuwait currently cutting production by double-digit percentages. Indeed, a large part of the lower output of other OPEC+ members is not voluntary but rather reflects their inability to meet their quotas.

Related: US oil demand bright as China dulls

However, commodity analysts at Standard Chartered took a more nuanced view of the unfolding situation. According to Stanchart, Saudi Arabia's increase in output to 84 thousand barrels per month (kb/d) per month from December 2024 does not mean that the Kingdom has changed policy and is aiming for market share, noting that Saudi Arabia does not have prices. A goal for many years. In StanChart's view, the main underlying story is that Saudi Arabia is sending a warning that it will accelerate the phase of voluntary cuts unless all partners involved meet their commitments. Stanchart sees Saudi Arabia's latest move as one of several recent warnings issued by any country for free-riding with the consent of others.

Compliance with commitments will be critical in determining whether the oil market remains strong.

Russia, Iraq and Kazakhstan submitted theirs in July compensation plan to the OPEC Secretariat for the first six months of 2024 crude oil overproduction. According to OPEC, Russia will be fully compensated for 15 months until September 2025 with a 'return'. /d, Iraq 1,184 kb/d and Kazakhstan 620 kb/d. Compensating output from the three OPEC members works out to a combined 370 kb/d reduction in October and then varies between 162 kb/d and 206 kb/d from November 2024 to September 2025, according to Stanchart. Delays in implementing StanChart tapering will result in OPEC production falling by 530 kb/d in 2024-4 due to the addition of a compensatory schedule to the recently announced target reduction; 540 kb/d less in Q1 and Q2-2025 and 560 kb/d less in Q32025, if all promises are kept.

Stanchart has argued that the market's current assumption that compensation will not be cut is wrong because it is unlikely that other OPEC+ countries will take it lightly. Stanchart said Saudi Arabia was unlikely to back down on promises made by overproducers, noting that high-profile visits by OPEC Secretary-General Haitham Al Ghais to Iraq and Kazakhstan suggested OPEC wanted to follow through on promised cuts.

“I have strong assurances that Iraq is fully committed to DoC's ongoing market stabilization efforts. During this visit, Iraq presented clear and concrete steps to compensate for the overproduced volume and assured that it will achieve full compliance going forward. “Al Ghais said at the end of the visit to Baghdad.

Budget deficit

It's unlikely that Saudi Arabia will be too reckless in its tepid pace as the country is already facing a significant budget deficit at current oil prices. After enjoying a rare budget surplus in 2022, most Gulf Cooperation Council (GCC) economies see their budget deficits widening as current oil prices are still below what is needed to balance their budgets.

Saudi Arabia, the GCC's largest economy, needs oil prices of $96.20 per barrel, according to the IMF. To balance its booksThanks in large part to MBS' ambitious Vision 2030. The situation is not helped by the fact that over the past few years, the oil-rich nation has borne the brunt of OPEC+ production cuts. The state is currently pumping 8.9 million b/d, the lowest level since 2011. Effectively, Saudi Arabia is selling less oil at lower prices, thus widening the fiscal deficit.

That said, the Saudis may still bear some pain in the oil market. Irina Slav as a contributor to OilPrice.com mentionedSaudi Arabia can simply slam the brakes on Vision 2030, maybe turn it into Vision 2040 or even Vision 2050 if the oil market refuses to cooperate. Further, the FT reported that Saudi Arabia believes it has sufficient alternative financing options to weather periods of low prices, including tapping foreign currency reserves or issuing sovereign debt.

In the final analysis, oil markets will just have to wait before they decide to call Saudi Arabia's bluff. Fortunately, the Covid-era oil crisis and the crash in oil prices shaped OPEC+ and many producers have maintained impressive production lines ever since. It is unlikely that they would be willing to engage in another race to the bottom by flooding the market with oil.

By Alex Kimani for Oilprice.com

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