Saudi: ”Cut or be doomed”

SEB - Prognoser på råvaror - CommodityThis is basically the message that Saudi Arabia is sending to OPEC+ ahead of today’s OPEC meeting and tomorrow’s OPEC+ meeting. According to an unnamed OPEC delegate Saudi Arabia produced 11.1 m bl/d in November but supplied a total of 11.3 m bl/d to the market including supplies drawn from inventories (Blmbrg).

If all members in OPEC+ want to produce at 100% then Saudi Arabia can follow suite and produce at max capacity as well is what Saudi Arabia is saying with its November production data now available to the market. Full throttle production from both Saudi Arabia, the US and Russia will clearly be more than the market can swallow.

Bjarne Schieldrop, Chief analyst commodities at SEB

Bjarne Schieldrop, Chief analyst commodities

American Petroleum Institute yesterday indicated that US crude stocks rose 5.4 m bl, gasoline stocks rose 3.6 m bl and also distillate stocks rose 4.3 m bl last week and in total 13.3 m bl. That would be the biggest weekly total (crude, gasoline, distillates) US inventory rise since early 2017 if that is indeed the data we’ll see today at 17.00 CET. So today’s US oil inventory data are likely to underpin the message that OPEC/OPEC+ needs to agree on production cuts today and tomorrow. We believe that Saudi Arabia’s actual production strategy will be highly persuasive versus the rest of OPEC+ and as such we still strongly believe that OPEC+ will decide to cut production when they meet in Friday in Vienna.

It is a regular OPEC meeting today with agenda: Open session 10:00 CET, closed session 11:00, press conference 13:00. It is the same agenda again tomorrow when there will be a similar meeting for the total OPEC+. The final message and decision will not be fully communicated before Friday at 13:00 CET.

OPEC’s own advisory committee has recommended a cut of 1.3 m bl/d for 2019 to balance the market. Yesterday the Joint Ministerial Monitoring Committee (JMMC, a body of OPEC+) concluded to recommend a production cut as well though no number was communicated.

Important to the JMMC’s communication is that production cuts will be measured from a baseline of the maximum of Sep and Oct production. This is highly important. For Saudi Arabia this baseline is 10.7 m bl/d. So if OPEC+ agrees to cut and Saudi Arabia cuts 200 k bl/d then Saudi’s production target will be 10.5 m bl/d and thus down a full 0.8 m bl/d versus what it actually supplied in November (11.3 m bl/d). On a ytd average Saudi Arabia produced 10.2 m bl/d ytd. So a 10.5 m bl/d target would be a decrease vs. November but it would be an increase versus its 2018 average production. An average production of 10.5 m bl/d from Saudi Arabia would also be the highest production Saudi Arabia ever has produced in a year ever in history. So at 10.5 m bl/d Saudi is not really losing out at all.

There are clear concerns for over-tightening. Visibility on Iran, Venezuela, Libya, Nigeria, Angola and more makes it impossible to really forecast the magnitude of needed cuts. “We don’t even know if there will be a need for cuts in 2019” was the statement from Aleksander Novak and we totally agree. As such OPEC+ is likely to agree for 6 months during the first half of 2019 and then the situation will be reviewed again at the next meeting in May/June 2019. Very sensible in our view.

But for now Saudi is saying to the rest of OPEC+: “Cut or be doomed. We can produce at 100% as well if that is what all of you want to do”. We think that Saudi’s argumentation will be irresistible for both OPEC and OPEC+ and that an agreement on cuts will be reached today and tomorrow. The message at today’s press conference is likely going to be that OPEC is ready to cut if OPEC+ follows suite on Friday.

Ch1: Saudi Arabia’s crude oil production. “Cut or be doomed” is Saudi’s message to OPEC+

Saudi Arabia’s crude oil production. “Cut or be doomed” is Saudi’s message to OPEC+

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