Rapidan Energy Group suggests that Saudi Arabia might start reducing its production cuts earlier than many oil market participants anticipate. The top global crude oil exporter is cautious about the risk of causing demand destruction due to excessively high prices.
This move follows the Saudi and OPEC+ production cuts, along with declining commercial crude inventories in the U.S., which have led to oil prices reaching their highest levels in months. The U.S. benchmark surged to a 13-month high, while Brent reached its highest price since November 2022, marking a new high for 2023.
Saudi Arabia recently extended its 1 million barrels per day (bpd) cut until December, with monthly reviews planned until the end of 2023.
According to Bob McNally, President of Rapidan Energy, Saudi Arabia’s intention is to prevent market overheating. McNally emphasized that they do not wish to deliberately tighten the market excessively because a price spike could lead to a collapse in demand and a subsequent market downturn.
McNally suggested that the prudent approach to controlling prices is for Saudi Arabia and OPEC+ to signal that they have made their point and discouraged speculative shorts from the market.
Warren Patterson, Head of Commodities Strategy at ING, also noted that while the oil price rally may have room to continue, sustaining a price above $100 per barrel for Brent may not be feasible. He cautioned that OPEC+ should be cautious about tightening the oil market excessively, as pushing prices to levels where there is a higher risk of demand destruction would not be in their best interest.
Patterson added that OPEC+ is likely to continue reviewing supply cuts monthly, which could lead to a gradual easing of additional voluntary cuts by the group, particularly by Saudi Arabia, to alleviate pressure on the market.