Oil prices rose almost 2% on Monday after the OPEC+ group extended its production cuts of 3.16 million barrels a day to the end of next year while the Saudis have also added an extra cut of a million barrels a day to the size of the reduction.
The move by the Saudis to drive the extension of the cuts out by 18 months and lift the size of its contribution is a form of insurance against the unknown of what happens to global demand for oil in that time – the two previous cuts in production in October 2022 and April this year have not worked.
US crude was around $US85 a barrel last October when the first cut of 2 million barrels was announced. Oil prices rose, then resumed their long fall until April when the extra 1.16 million barrels saw the price steady and rise to around $US87 a barrel before easing.
They fell to around $US72 a barrel for Brent in the middle of last week and under $US70 a barrel for US West Texas Intermediate type crude.
This latest cut is tacit recognition that no one knows at OPEC or anywhere else knows what will happen to the economy and demand for oil in the next year and a half – but the oil producer lobby fears the worse.
The world economy is wobbly, the much-heralded Chinese economic re-opening has gone nowhere and its weaker than expected oil purchases is responsible in part for the price falls this year
OPEC now accepts that the cuts last October and April of this year failed to keep support prices at the high levels they want, so here’s a longer duration for the cut and an extra half- million-barrel contribution from the Saudis to make the figure more credible.
So far this year Brent is down just over 10% and WTI is off more than 9%.
The OPEC+ group otherwise collectively decided to stick to its targets for 2023, with production at 40.463 million barrels a day next year.
The ASX prices of our major oil and gas groups like Woodside (up 0.7%), Santos (up 1%) and Beach (down 0.7%) were weak to slightly higher in the wake of the Saudi-driven deal.
The bigger influences were the removal of the US debt crisis concerns and the continuing very narrow tech boom on Wall Street. That saw the ASX 200 rise 1% or 71 points to close at 7,216.30.
“This is a grand day for us, because the quality of the agreement is unprecedented,” Saudi Energy Minister Abdulaziz bin Salman said at a news conference on Sunday (according to AP News and Reuters), adding that the new production targets are “much more transparent and much more fair.”
He said the cut could be extended and that the group “will do whatever is necessary to bring stability to this market.”
The problem for oil is threefold – Russia can’t cut production any further because that would be tantamount to cutting its throat. It may be selling lots of crude and oil products like diesel, but it is doing so at a loss or near breakeven and needs every dollar for its war financing.
It is in the stupid, fruitless war in Ukraine which is costing it money and lives needlessly, but can’t extract itself, despite the best endeavours of countries like China and Brazil to manufacture a peace process that is going nowhere.
The Saudis’ costs of living have escalated with their ambitious plan to decarbonise while trying to gouge as much money as possible from the West and customers like China who is buying lots of Russian oil.
The International Monetary Fund estimates the kingdom needs $US80.90 per barrel to meet its future spending commitments, which include a planned $US500 billion futuristic desert city project called Neom.
Global prices are less than that level now and if they continue at that level, the pressure will be on the Saudis to cut output again or start cutting spending and dropping ideas for futuristic cities.
And no one knows very much about what is happening in the global economy with tight monetary policy stances in every major economy running into strong labour markets and softening demand that hasn’t so far triggered a recession – but they might.
The German economy tumbled into a recession in the December and January quarters (and Japan fell into a recession in the final half of 2022, but has rebounded).
And a smaller factor is the continuing growth in renewables and especially electric vehicles. More than 14 million EVs will be sold globally this year and close to 20 million by 2025. That will be between 18% and 24% of global vehicle sales over the next couple of years.
Ten million EVs were sold in 2022 around the world. By the middle of 2024, the rising number of sales will be having a negative impact on sales of oil and petrol in major markets like China, Europe and the US.
The impact won’t be huge, but it will be discernible and market reports will be mentioning the impact far more regularly.
And finally, if the latest cuts work to boost and hold prices at higher levels, that will add to inflation, see further interest rates rises and push the European and US (and Australia and other economies) further towards recession, which will then cut oil demand, reduce prices and hurt the Saudi state finances (and Russia’s war effort).