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Saudi Arabia is increasing supply. Why is the oil price holding firm? - Dailyforextrading

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Saudi Arabia is increasing supply. Why is the oil price holding firm? - Dailyforextrading

The price of oil has barely budged since Saudi Arabia and allied producers agreed to start pumping more quickly. The Brent crude contract for August delivery settled at $119.51 a barrel on Monday 

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Higher than before last Thursday’s momentous meeting of the Opec+ group. When Saudi Arabia, the so-called central bank of oil, can’t stop the rally, what is going on?

What did Opec+ promise — and why now?

After months of White House pressure, Riyadh relented and agreed with other Opec+ producers to accelerate production. The decision pulls forward supply increases already planned by the group for September into July and August when the monthly increases will be about 650,000 barrels a day.

The increases were an attempt to quell an oil market rally that threatens global economic growth and has pushed US petrol prices to historic highs, causing a political headache for president Joe Biden just months ahead of congressional midterm elections.

Analysts and an official involved in the diplomacy said the agreement pointed to a thaw between Saudi Arabia and the Biden White House.

Why are oil prices still rising anyway?

The volumes might deliver less new oil than the headline suggests. Of the total, 432,000 b/d of extra oil was already planned in each month, and thus priced into the market.

Many smaller Opec+ member countries have already been failing to meet lower production quotas in recent months too, leaving the group about 2.6mn b/d below its intended output, according to S&P Global — almost 3 per cent of global oil demand.

All told, consultants, Rapidan Energy Group believe that Opec+ will manage to increase output by just 355,000 b/d in the next two months.

That sum is small compared with the 3mn b/d of oil supply that the International Energy Agency says could be lost from Russia in the second half of the year as sanctions tighten.

“It’s a complete about-face for Saudi oil policy, but it doesn’t change much,” said Bob McNally, head of Rapidan and a former adviser to President George W Bush. “It’s hardly a return to the old foundational oil-stability-for-security bargain [between Saudi Arabia and the US], but it’s a meaningful symbolic step.”

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Can other oil producers — or consumers — help to contain the rally? The US wanted more from Opec+ because supply growth from other producers has also been tepid — especially in Texas.

US shale suppliers, whose galloping production helped keep oil prices in check in recent years, remain reluctant to speed up the drilling of new wells. They are instead pouring their windfall from higher prices into dividends and share buybacks.

US efforts to encourage more crude exports from Venezuela’s sanctioned oil sector have not yet worked. A new nuclear deal with Iran that would allow its oil back into the market remains distant.

Asking for more Canadian oil would be politically treacherous for Biden, given his decision to cancel a permit for the contentious Keystone XL pipeline. New supplies from any of these countries would take months to arrive anyway.

Meanwhile, Saudi Arabia’s decision to accelerate supply increases will further stretch Opec’s spare capacity — a factor that had underpinned past rallies. Already this emergency supply buffer is now down to a “historically low” 2mn b/d, notes Morgan Stanley.

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At the same time, consumption continues to rise — and when China’s economy reopens from Covid-19 lockdowns it could lurch higher still. Opec thinks the world will consume 100.3mn b/d this year, up from 97mn b/d in 2021. Source: Financial Times 

 

 

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