Macroscope: Summertime blues in the oil market

Tom Nelson

If at first you don’t succeed, try, try again, says Tom Nelson, Head of Thematic Equities and Co- Portfolio Manager of Global Natural Resources at Ninety One

Saudi Arabia’s oil minister Prince Abdulaziz bin Salman, the half-brother of Crown Prince Mohammed bin Salman and the first royal to serve as the kingdom’s oil minister, has reduced Saudi Arabia’s oil output three times in eight months (October, April, June) in an attempt to put a floor under oil prices. The October cut by the wider OPEC+ group of twenty-three countries was a reduction of 2m barrels per day, the largest cut since the pandemic. For context, the world is expected to consume just over 102m barrels per day of crude oil this year. In early April there was an additional reduction of 1.2m barrels per day announced by OPEC+, with Saudi Arabia pledging to cut 500,000 barrels per day of this. However, the Kingdom took even more decisive action during the early June meeting with an additional cut of 1m barrels per day, which Prince Abdulaziz bin Salman described as a “Saudi lollipop.” However, there is no sign of a sugar high among oil traders: the front-month Brent contract fell from $97 per barrel in October to $75 per barrel at the end of June.

These are uneasy times in the oil market. The OPEC+ group meets again in Vienna this week alongside oil industry chief executives and the stakes are high. So high, in fact, that reporters from Reuters, Bloomberg and the Wall Street Journal have been denied access to the seminar. This could be interpreted as a signal that there is growing discord among the OPEC+ group; the alliance between Saudi Arabia and Russia has always been strained, and this came to a head in March 2020 when the countries failed to agree on oil production cuts which triggered a price war and a collapse in oil prices from $60 per barrel to $20 per barrel within six weeks. Looking further back, the infamous OPEC meeting in November 2014 precipitated a fall from $80 per barrel to $45 per barrel over a similar timeframe. The then Saudi oil minister Ali Al-Naimi summarised the discussions as follows: “There was no appetite for sharing the burden, so we left it to the market as the most efficient way of balancing supply and demand.”

In this environment, there is a possibility that Prince Abdulaziz bin Salman might choose to step back from actively managing the market - and let oil prices go - if he perceives that other producers are not sharing the burden of reducing their market share. A short sharp crash would remind the market that Saudi Arabia remains the lowest-cost producer and the supplier of last resort as the world starts to transition away from crude oil.

Of course, there are ample reasons why an oil price wash-out would not be popular in the Kingdom. The Vision 2030 agenda is highly reliant on oil revenues for the foreseeable future—with current account and fiscal break evens estimated to be around $80 a barrel—and expansionary capex and fiscal policy would be undermined by a crash. The other major variable is clearly demand. The International Energy Agency continues to forecast a major upswing in global oil demand in the second half of the year, led by China: the June Oil Market Report increased its 2023 demand growth estimate to 2.4m barrels per day, with China accounting for 60% of the year-on-year increase. If the China rebound does not materialise then we can be reasonably confident that OPEC’s resolve will be tested again soon. Prince Abdulaziz bin Salman has talked publicly about being “proactive, pre-emptive and precautionary” but adding “we always want to add suspense…we don’t want people to try to predict what we do.”

It promises to be an exciting ride in the second half of the year.