The oil market has increasingly reliable and diversified sources. Compared to the iron oligopoly of just twenty years ago, there are now large independent producers of crude oil in America (the United States, Canada, Guyana and Brazil) and promises of a future in Africa. This leads Saudi Arabia and the Organization of the Petroleum Exporting Countries (OPEC) to resort with some assiduity to production cuts (pumping less crude to make it more expensive) to keep prices up, as happened last year. However, part of that strategy may be about to be reversed. Beyond OPEC’s latest statements, there is one move that could anticipate the return to the market of hundreds of thousands of barrels of crude oil: Saudi Arabia is set to announce a price cut for its oil.
Everything indicates that Saudi Arabia prepares to cut prices of most crude oil sold to Asia in Octoberafter the Dubai index (the region’s benchmark crude oil) also suffered significant price drops. Experts believe that this reduction could be a prelude to an increase in production by the Organization of the Petroleum Exporting Countries (OPEC), which already announced a few months ago that it could start putting back on the market part of the voluntary reductions (2.2 million barrels per day) that they had been maintaining for months.
This decision would confirm the “surrender” of Saudi Arabia, the de facto leader of OPEC, which has historically defended a tight market (with a restricted oil supply) to favor a relatively high price per barrel. But the complaints and “rebellions” of several members of the cartel who prefer to produce more crude and sell more barrels are forcing Riyadh to give in and authorize an increase in crude pumping from October.
Even though Saudi Arabia is one of the biggest victims of the cuts (it produces nine million barrels a day when it has the capacity to pump 12 or 13 million), generally prefers the crude oil market to operate with a slight supply deficit, which forces a drop in stocks (accumulated oil and refined products), causing a rise in prices. This time, Riyadh could give in and allow an increase in supply and a consequent drop in barrel prices.
THE Expected price cuts range from 50 to 70 cents per barrelreflecting weak refining margins in China and an increase in OPEC+ supply. Furthermore, according to sources consulted by ReutersThe price drop comes at an unusual time: “Margins are bad in general and worse in China,” one of the sources said, adding that September, which is usually the best month for oil demand, but this year could disappoint, could also be behind the reduction in Saudi crude.
OPEC to open oil tap
Overall, the supply from OPEC+ (OPEC plus Russia and its allies) is expected to increase from October production at 180,000 barrels per day as part of a plan to begin unwinding a more recent tranche of voluntary production cuts of 2.2 million barrels per day, keeping the remaining cuts in place through the end of 2025.
In addition, the price of the benchmark barrel on the world markets is also pushing Saudi Arabia to reduce its crude oil prices. For example, the barrel of Brent, a benchmark in Europe, is trading today in the area of 76-77 dollars per barrel (a resistance zone), ten dollars less than at the beginning of July. West Texas, a benchmark in the United States, is also trading far from annual highs and stands at $73.6.
There is a lot of uncertainty in the oil market for a simple reason: all the main price drivers are expected to lead to very “expensive” oil (serious disruptions in major fields in Libya, the summer season is the best for consumption, geopolitical tensions are high, OPEC is maintaining strict cuts…) but the price of crude oil seems to remain at a comfortable level for consumers.
More and more people in the market are wondering whether the price of a barrel is artificially low and will rise as soon as the market correctly weighs the fundamentals or, on the contrary, whether the market carefully analyzes all the factors and the price of crude oil. It is heading for a sharp decline as soon as one of the “bullish” factors moderates or disappears. In principle, the Libyan oil fields will not be closed forever, while geopolitical tensions may also ease in the short term. Time will tell the answer.
