What does Saudi Arabia know? A lot about global oil markets

Saudi Press Agency/via Reuters

All the oil experts had just one question after yesterday’s surprise Opec+ output cuts: “What does Saudi Arabia know that we don’t?”

The cuts – announced via a statement from the Saudi Energy Ministry published on the kingdom’s official news site and restated in an official Opec release – were billed as “a precautionary measure aimed at supporting the stability of the oil market,” but to say they were unexpected is an understatement.

Just six weeks ago Prince Abdulaziz Bin Salman, the Saudi energy minister, told an interviewer that “the October 2022 agreement is here to stay for the rest of the year (2023). Period.”

• Saudi Arabia leads Opec+ to cut nearly 1.2m bpd from May
• Opec forecasts rise in global oil demand on tourism rebound
• QatarEnergy enters Mauritania offshore exploration with Shell

Of course, there was nothing in that statement contradicted by the extra cuts announced on Sunday. The new output cuts – amounting to roughly 1.6 million barrels per day spread across nine members of Opec+ – are in addition to the two million announced last October, which will indeed continue to the end of the year.

Nonetheless, the assumption was that something significant must have arisen to justify the new production levels.

The International Energy Agency said just recently that demand from a “resurgent China” would increase by 3.2m barrels a day by the fourth quarter of 2023, one of the biggest increases in demand for more than a decade.

Did the Saudi-led cut mean that forecast was no longer accurate?

Not necessarily. Several factors seem to have motivated the Saudi decision, apart from a longstanding cautionary stance on prospects for Chinese economic recovery.

Perhaps most important was a reluctance, in an era of greatly heightened global tensions, to put all the kingdom’s eggs in the basket labelled “resurgent economic growth”.

As Prince Abdulaziz has repeatedly insisted, “I’ll believe it when I see it.”

Volatility concerns

The war in Ukraine, and the oil price caps on Russia that have been introduced because of it, have certainly been taken seriously as volatility indicators in Riyadh, as well as a potential threat to the kingdom and other Opec+ members.

Likewise, the overall global economic situation is also causing concern. The US banking crisis, and the changes to US monetary policy that might still come about because of it, raised more uncertainty about global demand for oil.

One specific factor, mentioned by people familiar with the Saudi rationale, was that the US had failed to deliver on promises to replenish its own strategic petroleum reserve, depleted last year in an anti-inflationary initiative, despite falling prices.

These factors had weighed on the crude price, with Brent crude down nearly 9 percent over the past six months and falling below what many regarded as the “goldilocks level” of around $85 a barrel – not too hot, and not too cold.

News of the extra cuts on Sunday brought the price of Brent crude back above those levels in early Asian trading, although it shed some of the gains later as western markets prepared to open.

The bullish analysts at Goldman Sachs raised their year-end forecast to $95 per barrel and said it would be at $100 in 2024.

Despite attempts in some quarters to paint the Opec+ output cuts as another round in some US-Saudi confrontation, the American reaction was actually rather muted, initially at least.

“Not advisable under current market conditions”, said the White House, suggesting a disagreement about market fundamentals rather than a serious geopolitical spat.

Other experts pointed out that the US, as a leading energy exporter, might actually be rather pleased about higher energy prices, as long as the price of gas at the pump could be moderated.

So, in answer to the question, “What does Saudi Arabia know?” Nothing specific, it would appear, that isn’t in plain sight to all of us.

But the kingdom and Opec+ have a knack for calling the market right, as they did with the October output cuts. It would be extremely risky to bet against them on oil.

Frank Kane is a communications consultant focused on Saudi Arabia and the UAE