Saudi cuts oil output below OPEC quota

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Saudi Arabia, the world’s largest oil producer, now seems to be moving to Phase 2 of its efforts to achieve a $75 – $100bbl price range. As the blog noted in early December, the Saudis’ initial tactic was to play ‘hardball’ within OPEC. The aim was to ensure that other countries did not try to get a free ride, by forcing Saudi to make most of the cuts needed to bring supply back in line with slowing demand (as happened in the early 1980s).

Thus prices were allowed to slip to a low of $32/bbl, in line with the blog’s forecast of a temporary $20 – $30bbl floor (made when oil was $70bbl). And the Saudi tactic has led to high levels of OPEC compliance, as members recognised the dire consequences of indiscipline. Compliance with OPEC quotas is now around 75%, with output cut by over 3mbd versus the 4.2mbd target. Current OPEC production is just 26.15mbd according to PetroLogistics, who track tanker movements.

Now, the Saudis are signalling a more aggressive approach. Oil Minister Ali al-Naimi has suggested that Saudi will now reduce production by a further 300kbd, below their OPEC quota, and commented that “we are working hard to bring the market in balance”. Their first aim is clearly to stabilise the market around the $35 – $45 range. This looks achievable, especially with the USA’s summer driving season just about to start.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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