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Saudi Arabia makes a promise that it can’t keep

The Russians pumped 11.32 million barrels a day in the first half of August, according to Interfax.

Bloomberg|
Aug 19, 2019, 08.53 AM IST
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By Julian Lee

Saudi Arabia isn’t as willing to do whatever it takes to support oil prices as it would have us believe. That’s the only conclusion one can draw from what we’ve learnt since a government official said the kingdom wouldn’t tolerate a continued price slide.

After crude fell to a seven-month low earlier this month, Saudi Arabia got on the phone to other members of the OPEC+ group of nations to discuss possible policy responses. It doesn’t appear to have got very far.


Russia – the key non-OPEC member of the extended producer group – made all the right noises. An emailed statement from its energy ministry said it was “utterly important to act responsibly” by giving the market only as much oil as was needed. You might think that would mean Russia sticking to the production target it agreed with OPEC in December. You’d be wrong.

The Russians pumped 11.32 million barrels a day in the first half of August, according to Interfax. That’s up by 180,000 barrels from July and above its pledged daily level of 11.19 million barrels. While the country did produce less than required for three months in a row through to July, that was mainly the result of the Druzhba pipeline contamination crisis.

Indeed, Moscow may be better able to weather lower prices than Riyadh. US President Donald Trump’s sanctions on exports from Iran and Venezuela have boosted Russia’s oil income by about $1 billion dollars since November. Russian Urals grade is a pretty good substitute for Iranian crude for European refiners and its value has risen relative to that of the benchmark Brent.

So what about Saudi Arabia’s OPEC partners? The biggest of those, Iraq, doesn’t seem to be helping much either. Tanker-tracking data compiled by Bloomberg suggest that its crude exports in the first half of August were the highest in three months. Flows out of West Africa also appear to have been robust in August.

Will the kingdom go it alone? Perhaps not.

Having already cut more than twice as much oil output as it promised in December, Riyadh has signaled its unwillingness to keep shouldering the burden alone. Its energy minister Khalid Al-Falih insisted at OPEC’s last meeting in July that the Saudis had already cut “deep enough.”

They did manage to generate a brief bump in prices by that suggestion of doing whatever it takes. But the market recovery is already running out of steam. And the promise was never quite as meaningful as some thought.

As part of the pledge, Saudi officials said the kingdom would keep oil exports below 7 million barrels a day in September and supply customers with 700,000 barrels a day less than they’d asked for. That looks like a big number, but it rather depends on what potential buyers asked for. Dig a bit deeper and the commitment starts to look less bullish.

Saudi Arabia didn’t actually say it would cut exports by 700,000 barrels a day next month. Instead, the officials pointed to the 10.3 million barrels a day that they could theoretically produce in September to meet demand, and that the reduction would come from that figure. (It’s worth noting that this 10.3 million figure is more than the Saudis have produced in any other month this year, according to data from the kingdom). So the upshot is that Saudi Arabia’s actual production next month may be about 9.6 million barrels a day. It says it produced 9.58 million last month, so this doesn’t look like a cut at all.

And then there’s the issue of where the cuts will come from. Saudi Aramco, the national oil company, has allocated full volumes of contractual crude supply for September sales to at least six buyers in Asia. So the US and Europe will have to bear the brunt of reductions. Supplies to US buyers will be about 300,000 barrels a day less than they’d asked for, according to the officials, while cuts to European buyers will need to be bigger still to hit the 700,000 target.

That’s going to be a stretch. The kingdom has only shipped about 530,00 barrels a day to North America so far this year, while deliveries to Europe have averaged just 210,000 barrels, according to Bloomberg tanker tracking. So to be in a position to make the sort of cuts being talked about, buyers must have been asking for a lot more oil than they’ve bought from Saudi Arabia in the recent past.

The numbers just don’t stack up. If you’re waiting for a big output cut from Saudi Arabia to rescue oil prices – don’t.

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