The Saudi Energy Minister likes to be known as the Alan Greenspan of the global oil market but this weekend he came off more like the Vito Corleone of the global energy market. The Saudis made an offer that Angola and Nigeria couldn’t refuse as they lost 300,000 a barrel a day from their production quota even though Angola was ready to walk from and did leave the meeting early. Saudi Energy Minister Prince Abdulaziz bin Salman called the African nations into a hotel room and basically told Angola and Nigeria that they were going to lose the quota, that they were not producing anyway, so he could give it to the UAE who threatened to walk from OPEC months ago unless they got what they felt was their fair share of the OPEC pie.
Angola for one, did not want to give up their quota share because they must have that quota as an incentive to attract much needed investment to increase their oil production. Angola left the meeting but after some diplomatic moves from other OPEC members, they decided to go along. They knew that if this meeting looked like a failure then the oil market would tank and besides the Saudis offered up a 1 million barrel a day voluntary production cut as sugar to help the medicine go down. Or as Saudi Energy Minister Prince Abdulaziz bin Salman said that he would offer a “Saudi lollipop” that would “ice the cake” to not only stabilize the global oil market, but really to ease the pain of Nigeria and Angola that lost 300,000 a day from their quota.
Saudi’s energy ministry said the country’s output would drop to 9 million barrels per day (bpd) in July from around 10 million bpd in May, the biggest reduction in years. That adds to the 2 million barrels a day cut from October and over the 1.6 million barrels a day voluntary cut in April. So, OPEC and Russia have cut 3.66 million bpd, amounting to 3.6% of global demand.
That is assuming that Russia, as they promise, will actually cut back. Russia’s Deputy Prime Minister Alexander Novak said the current output cuts were being extended until the end of 2024 after examining the matter “for a long time”. Some reports say that Russia ship loadings are down in a sign they might start to comply.
Yet unless the economy slows, it might not matter. International Energy Agency Chief Fatih Birol says the possibility of prices going up are a lot more likely after OPEC+ Decision. Mr Birol is warning that “there is an imbalance in the oil market in the second half of this year and the OPEC decision will make it worse."
The move will also make it harder for the Biden administration to refill the SPR. The goal to refill the SPR below $70 a barrel has gone out the widow and the Saudis did not want to make it any easier for them.
The bottom line is that this OPEC production cut puts a floor in the price of oil. While there are signs that the global economy may fall into a recession, unless that happens, we’re going to see a significant supply shortage later in the year. If the Fed doesn’t raise interest rates at this meeting, we would expect more upward momentum to the price of oil as the dollar would weaken.
The markets are also going to have to deal with the reality of more production fall off by the United States as a rig count plummets. Reuters reported the US oil drilling activity has fallen again, with the number of active rigs targeting oil-rich formations down by -15 over the seven days ending on June 2. The oil rig count is down by -72 (-11%) from its recent peak at the start of December 2022. The cyclical upturn in drilling that started after the first wave of the coronavirus pandemic is over. Drilling activity is falling in line with lower oil prices since the middle of 2022.
We are looking for the crude supplies in the US to resume their drain with a 3.0 million barrel draw this week as well as a 2-million-barrel drop in distillates and a 2-million-barrel drop in gasoline.