Oil Supply Is About To Get Another Trim

Oil Supply Is About To Get Another Trim
Daniel Johnston

6 months ago2 mins

What’s going on here?

Believing the oil price needs sharpened up, Saudi Arabia announced another supply trim over the weekend.

What does this mean?

Call them crazy, but folks and firms tend to spend carefully when imposing interest rates and inflation send economies hurtling toward recessions. And because that prudent behavior whittles down demand for industry-fueling oil, the price of the stuff has been on a slump this year. So even though OPEC – a group of oil-producing nations that pump around 40% of the world’s slippery elixir – cut supply just two months ago, mounting concerns over China’s future kept prices squashed last month. Now, though, OPEC’s de facto leader Saudi Arabia has announced another cut of one million barrels a day from July, saying it’ll do “whatever is necessary” to stabilize the market. So far, so good: oil prices initially jumped after the reveal.

Saudi oil cuts

Why should I care?

Zooming in: Beware of the world’s biggest oil exporter.

Saudi was the only country in the group to announce more cuts, with others merely pledging to maintain their current cuts until 2024. But the big dog has reason to bark loudest: the IMF estimates Saudi needs the oil price above $80 a barrel to balance its government budget and fund projects touted to transform its economy. And since Saudi has a rare track record of actually delivering on promised cuts, you can bet the bite will probably match the bark.

IMF breakeven estimates
Source: Bloomberg

The bigger picture: Public transport ain’t all bad.

This cut will take Saudi’s production to its lowest in years, but the country will still have plenty of room to trim if needs be. So given that vow of “whatever is necessary”, Goldman Sachs reckons its forecast of $95 a barrel by the end of the year is looking more likely. In reality, that’ll depend on how demand shapes up – but if Goldman’s theory comes good, gas fumes won’t be the only reason eyes water at the pumps.



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