Oil stumbled despite Saudi precautionary cut; Dow slips

Oil (WTI-June Exp) jumped to almost 74.31 early Asian Monday from Friday’s closing levels of 71.74 after Saudi Arabia pledged another big voluntary production cut (-1.00 mbpd) in July and as OPEC+ extends the current production cut deal into 2024. After warning oil short sellers (speculators) with ‘dire consequences’ a few weeks ago, Saudi's energy minister ABS said after the OPEC+ meeting Sunday the country's output would drop to 9 mbpd in July from around 10 mbpd in May, the biggest reduction in years:

"This is a Saudi lollipop. We wanted to ice the cake. We always want to add suspense. We don't want people to try to predict what we do--- This market needs stabilization. This is a grand day for us because the quality of the agreement is unprecedented---the new production targets are much more transparent and much more fair-- the cut could be extended and we will do whatever is necessary to bring stability to this market. We're hedging-- We're using the fundamentals to hedge. We will continue to hedge as long as we don't see clarity and stability [in the market]. We are there to do as things progress and more certainty comes out."

As a recapitulation, in mid-April oil jumped over +10% to almost 83.50 on an unexpected synchronized voluntary cut by several OPEC+ producers to the tune of -1.16 mbpd (effective from May’23), led by Saudi Arabia’s -0.5 mbpd. At the same time, Russia also officially extended its -0.5 mbpd voluntary cut till Dec’23. Thus the total OPEC+ voluntary cut would be -1.66 mbpd. This is in addition to the current compulsory cut of -2.00 mbpd till Dec’23. So, the total OPEC+ cut would be -3.66 mbpd till Dec’23-now extended up to Dec’24 (around 3.6% of global demand). But oil slips as there were already some chatters early Friday about an OPEC+ cut and the real effective production cut is much lower than being talked about.

But in April, oil soon stumbled from 83.50 and made a multi-month low around 63.70 in late May as the real effective OPEC+ cut was only around -0.5 mbpd. OPEC+ is consistently producing over -3 mbpd lower than the target amid outages, underinvestment, and Russian sanctions issues. Oil was also dragged by the concern of uneven recovery in China after COVID amid a synchronized slowdown in U.S. and Europe (macro headwinds). Also, the U.S. is not in a hurry to cover the SPR shorts (refill), contrary to earlier expectations to keep oil prices under a lid, negative for Russia’s effort to use oil funds for its Ukraine war.

Since Russia's invasion of Ukraine began in February’22, the West (NATO/G7) has accused OPEC of manipulating oil prices and undermining the global economy through high energy costs. The West has also accused OPEC of indirectly supporting Russia. On the other side, OPEC privately pointed out the West's ‘reckless’ money-printing addiction (QE) over the last decade has driven inflation and forced oil-producing nations to act to maintain oil market stability as oil revenue is the bread & butter for most of OPEC+ producers.

In addition to extending the existing OPEC+ cuts of -3.66 mbpd, OPEC+ also agreed on Sunday to reduce overall production targets from January 2024 by a further -1.4 mbpd versus current targets to a combined 40.46 mbpd; i.e. cumulative OPEC+ production cut would be -5.06 mbpd from Jan’24, almost 5% of global demand. But many of these cuts will be symbolic as the group lowered the targets for Russia, Nigeria and Angola to bring them into line with actual current production levels. By contrast, UAE was allowed to raise output targets by around +0.2 million bpd to +3.22 mbpd.

On Sunday, before the Saudi production cut announcement, OPEC+ reached a deal on output policy after seven rigorous hours of talks (usual OPEC squabbling) and decided to reduce overall production targets from JKan’24 by a further total of -1.4 mbpd.

The UAE will extend its voluntary cut of -0.144 mbpd until the end of December 2024, as a precautionary measure, in coordination with the countries participating in the OPEC Plus agreement, which had previously announced voluntary cuts in April. This voluntary cut will be from the required production level, as agreed upon at the 35th ministerial meeting of OPEC Plus on 4th June’23.

The UAE energy minister Mazroue said: "We have discussed this before, to adjust the production of the UAE. All accepted a level of production that is representative, and also they have been given ... the chance by the end of November to demonstrate a [higher] level of production."

OPEC+ issued an official statement Sunday:

In light of the continued commitment of the OPEC and non-OPEC Participating Countries in the Declaration of Cooperation (DoC) to achieve and sustain a stable oil market, and to provide long-term guidance for the market, and in line with the successful approach of being precautious, proactive, and pre-emptive, which has been consistently adopted by OPEC and non-OPEC Participating Countries in the Declaration of Cooperation, the Participating Countries decided to:

·         Reaffirm the Framework of the Declaration of Cooperation, signed on 10 December 2016 and further endorsed in subsequent meetings; as well as the Charter of Cooperation, signed on 2 July 2019

·         Adjust the level of overall crude oil production for OPEC and non-OPEC Participating Countries in the DoC to 40.46 mb/d, starting 1 January 2024 until 31 December 2024, which is to be distributed as per the attached table

·         Reaffirm and extend the mandate of the Joint Ministerial Monitoring Committee (JMMC) and its membership, to closely review global oil market conditions, oil production levels, and the level of conformity with the DoC and this Statement, assisted by the Joint Technical Committee (JTC) and the OPEC Secretariat. The JMMC is to be held every two months

·         Hold the OPEC and non-OPEC Ministerial Meeting (ONOMM) every six months in accordance with the ordinary OPEC scheduled conference

·         Grant the JMMC the authority to hold additional meetings or to request an OPEC and non-OPEC Ministerial Meeting at any time to address market developments, whenever deemed necessary

·         Reaffirm that the DoC conformity is to be monitored considering crude oil production, based on the information from secondary sources, and according to the methodology applied for OPEC Member Countries

·         Reiterate the critical importance of adhering to full conformity, and subscribe to the concept of compensation by those countries who produce above the required production level as per the attached table, in addition to their already decided production levels

·         Hold the 36th OPEC and non-OPEC Ministerial Meeting on Sunday 26 November 2023, in Vienna

Conclusion:

In reality, OPEC+ supply was around 43.23 mbpd in May (assuming unchanged supply from Iran, Libya, and Venezuela) against 42.83 mbpd in April; down by only -0.60 mbpd. Now even if we assume Saudi Arabia will extend its precautionary voluntary cut of around -1.00 mbpd beyond July through 2023, the OPEC+ supply would be around 45.52 mbpd higher than the estimated May supply of 43.23 mbpd.

Saudi Arabia is trying to support oil prices by announcing a voluntary cut to compensate for higher production from other OPEC+ producers. Also, Iran may be able to produce more in the coming days as Biden may withdraw the Iran sanction to teach a proper lesson to Saudi Arabia and Russia and to keep oil prices under control ahead of Nov’24 Presidential Election.

Bottom line:

Looking ahead, whatever may be the narrative, technically oil now has to sustain above 75.00 for any further rally to 78.000/80.00- 83.50/90.00 and 100.00; otherwise, sustaining below 74.50, the oil may again fall to 73.00-65.00/63.00 in the coming days.