Saudi Arabia’s assertion that it cut production in July to 10.29 million barrels per day (b/d) from June’s 10.49 million b/d came as a surprise since it telegraphed that it would lead OPEC ‘s one million b/d production increase. The Saudis told reporters and analysts on background in the days after OPEC’s June meeting that its production this summer would rise to nearly 10.8 million b/d.
Other sources that track Saudi production say the Kingdom’s production was indeed higher. Platts had Saudi July production at 10.63 million b/d and EIA had it at 10.6 million b/d. Even OPEC’ monthly report for July had Saudi production higher at 10.387 million b/d.
Our sources tell us that the Saudis called media outlets to press them to revise down their production survey number to be in line with the Saudi self-reported number to OPEC. Some made changes but others did not.
While we are told that the Saudis were genuinely upset by independent estimates of higher July production than what they disclosed, we also think the dispute benefits Saudi oil policy. More importantly, we believe the surprise move to announce a cut in production in July is a sign that Saudi Arabia remains committed to supporting higher oil prices despite public talk earlier this summer of more coordinated production with Russia to mitigate prices.
After oil prices hit $80 in May, OPEC came under pressure from President Trump as well as officials in other oil consuming countries. The Trump Administration, which had re-initiated nuclear sanctions on Iran, asked Saudi Arabia and other Gulf producers to increase production to combat higher prices. Heading into the summer driving season, Trump did not want to be blamed for Iran sanctions raising gasoline prices.
The Saudi oil minister at the press conference in Vienna in late June announcing a one million b/d hike in production said that “the machinery at Saudi Aramco was already in motion” to increase production in the month of June. Indeed Saudi production had jumped in June to 10.49 million b/d.
Based on June’s production boost and other conversations we’ve had with Saudi officials, we expected an equivalent hike in July. But the Saudis say there was instead of cut in production from June’s number. The real number is almost beside the point.
OPEC and Saudi Arabia were perfectly happy with oil prices in the $80 range and only changed strategy after pressure from Trump once he reimposed sanctions on Iran. But Saudi Arabia rightly believed that physical oil markets were adequately supplied. Amid rising gasoline prices in early summer, so-called NOPEC legislation was introduced in Congress to apply US anti-trust laws to OPEC. The NOPEC legislation rattled OPEC and combined with Trump tweets, Saudi Arabia convinced OPEC to go along with an announcement of higher production to get past the US mid-term congressional election in November.
At the same time, we never believed a sustained one million b/d hike was in the cards. We felt there would be initial headline-grabbing production hikes to assuage Trump and US lawmakers but the Saudis would recalibrate in August to see how markets reacted to OPEC’s summer chess moves. It seems the recalibration started one month sooner in July, and our friends at TankerTrackers.com tell us that Saudi crude exports for the first 14 days of August are unchanged from July.
The market is still trying to figure out the July production number but the conflicting data allows Saudi Arabia to benefit from both scenarios. A July production cut announced by Saudi Arabia provides some lift to oil prices and also helps with internal OPEC politics concerned about unilateral Saudi/Russia decisions. Independent estimates of a July production increase, especially from EIA, allows Saudi Arabia to wink about higher production to Trump and US lawmakers.
Nevertheless, the contretemps over July production is a sign to us that Saudi Arabia is committed to supporting higher prices or at least a floor on prices in the mid-$70 range. The strategy will be tested this fall as Venezuela production continues to go off the cliff and US sanctions on Iran oil looks to remove about one million b/d in November. Based on supply/demand fundamentals, we see oil prices going higher especially after the US elections in November when pressure on OPEC will be relieved.
Even with the June announcement of an added one million b/d in production, OPEC is still abiding by its 2016 production cut deal with Russia and other non-OPEC producers. Amid oil prices that could be the highest of the year, OPEC will have to decide at its December 3 meeting in Vienna whether to keep the production cut deal in place.
CONFERENCE CALL ON SAUDI PRODUCTION DATA: Hedgeye is hosting a special conference call on Wednesday, August 22 at 2:00 PM EST with TankerTrackers.com with its alternative data analysis of Saudi production as well as other topics including Iran export cuts from impending sanctions, China demand and US crude export trends.
Call Information – Wednesday, August 22, 2018 at 2:00 PM EST
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