Saudi Arabia’s oil minister has firmly rejected the notion that the kingdom’s recent production cuts are aimed at artificially inflating oil prices. Speaking at the World Petroleum Congress in Calgary, Energy Minister Prince Abdulaziz bin Salman emphasized that the decisions to reduce production were based on data and market dynamics rather than an intention to manipulate prices.
“It’s not about jacking up prices; it’s about making the decisions that are right when we have the data,” Prince Abdulaziz stated, countering claims of price manipulation.
He pointed to ongoing uncertainties in the global oil market, including concerns about oil consumption in China, a manufacturing slowdown in Europe, and the unpredictability of inflation and interest rates in North America and Europe. These factors, he argued, necessitated cautious decision-making in the oil industry.
Prince Abdulaziz dismissed forecasts predicting a significant crude oil deficit in the fourth quarter, highlighting the inherent unreliability of supply and demand projections. He remarked, “It’s always better to go by my motto, which is, ‘I believe it when I see it.’ When reality aligns with forecasts, Hallelujah, we can produce more.”
Furthermore, he criticized the International Energy Agency (IEA), suggesting that it had transitioned from being a market forecaster to a platform engaged in political advocacy.
However, the IEA is not the sole entity forecasting a substantial depletion of oil inventories, which are already below the long-term seasonal average. The considerable backwardation in futures contracts over the next six months indicates that the majority of oil traders share a similar view.
The additional production cuts initiated by Saudi Arabia and Russia will have eliminated a total of 125 million barrels of crude from the market by the end of September, with the potential to remove 245 million barrels by December, provided full implementation.
Meanwhile, the U.S. economy has shown signs of improvement, characterized by accelerated growth, subdued inflation, and the possibility of the central bank either ending or temporarily pausing its series of interest rate hikes.
This combination of reduced oil production and increased consumption has had a transformative effect on the outlook for oil inventories, prices, and calendar spreads. U.S. commercial crude inventories, a prominent indicator of the global market, have declined in seven of the past ten weeks, shedding a total of 32 million barrels since the end of June.
Front-month Brent futures prices have averaged over $91 per barrel in September, compared to $75 in June, adjusting for inflation.
Brent’s six-month calendar spread has shifted into a backwardation, averaging $4.50 per barrel in September, up from $1.33 in June. While the precise contributions of production cuts and improved economic growth to these developments are challenging to ascertain, it is reasonable to assume that output reductions have played a significant role in the price and spread increases.
Despite the rise in crude prices, they remain relatively moderate when compared to previous periods of high oil prices in 2007-2008 and 2011-2014, particularly when accounting for inflation. In real terms, monthly prices would need to average $110 per barrel to reach the 75th percentile for all months since 2000 and $146 to achieve the 90th percentile.
From the perspective of oil producers, real prices are not exceptionally high yet, potentially leaving room for further increases without adversely affecting consumption and revenues.
