Crude oil sees quick reversal of Saudi-cut pump

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The long-awaited OPEC+ meeting last weekend did once again provide the market with a lot of information and changes to digest. The sum of that information, not least Saudi Arabia’s decision to make a unilateral cut of one million barrels per day, so far only in July, should be considered mildly bullish as it would help to tighten the market. However, the market chose to see it differently, basically concluding that OPEC doubts its own projections of a +2 million barrels per day increased in 2023 demand, most of which has been expected to materialize during the second half of the year. 

The overall sentiment among analysts has in recent month been heavily leaning to a tightening crude oil market during H2 with OPEC’s own data indicating that global oil demand will exceed supplies by an average of roughly 1.5 million barrels a day in the second half of the year

It leaves us to conclude that for now the main driver of crude oil prices continues to be concerns about the global growth and demand outlook, not only in China, the world’s biggest importer, but also the US and other key consuming regions. Following last week’s short-covering rally ahead of the meeting, sellers have re-emerged, not least from macroeconomic-focused funds seeking a hedge against such a slowdown. In addition, the market may also worry what happens next if market conditions in the coming months prevent Saudi Arabia from adding the barrels back in, either through rising production from others or an economic slowdown leaving the barrels unwanted. 

Given the price weakness seen since the announcement, a back-of-envelope calculation shows the need from a Saudi perspective for a ten-dollar rally in crude oil for the one million barrels cut to be revenue neutral. Saudi Arabia normally lowers exports during the summer months to meet higher demand at home, so revenues will take an even harder hit, but at the same time even lower exports should help stabilise and eventually send prices higher. 

OPEC’s focus on supply management will likely enforce the view of a soft floor under the market, however, whether it is $70 in Brent or even lower remains to be seen, but a major drop is seen as unlikely. The upside potential, seem equally unlikely as long the focus remains on a weakening economic outlook. From a technical standpoint, the $78 to $80 area in Brent will likely offer a great deal of resistance and funds positioned for additional weakness are unlikely to change their negative price view until we see the return of an 8-handle.