Saudis are at risk of trapping themselves into suboptimal production targets

Post Title

Content (Main/Left)

Post China's reopening, early signals indicate that the increase in oil demand may not meet the predictions made by OPEC and other agencies. If the rise in demand significantly falls short of 1 million barrels per day (Mbd), compared to the anticipated 1.5+ Mbd, then Saudi Arabia's independent rebalancing efforts could turn out to be suboptimal.

Saudi Arabia perceives the current oil balances as temporary, expecting that strong demand growth will eventually result in a market shortage that only OPEC's spare capacity can remedy. However, if non-OPEC production growth persistently surprises Saudi Arabia during a period of stalling demand growth, the nation, which has set a goal to boost its production from 9 Mbd to 13 Mbd within the next 3 to 5 years, could face a dilemma. It might be forced to choose between maintaining stable prices at current levels without reaching production targets, or achieving production targets but causing prices to drop to levels that would deter less competitive producers.

Saudi Arabia appears to maintain the belief that oil demand will correlate well with GDP and population growth, attributing any supply/demand weakness to cyclical factors. However, if this belief proves to be too optimistic and other more structural factors such as decarbonization and plateauing growth in China are influencing the situation, then Saudi Arabia's production ambitions might only be realized through a strategy driven by market share.

It's also worth noting that in the current market context, with Brent crude trading around $75 per barrel, every producer worldwide is satisfied with their earnings and would gladly accelerate production growth given the prospect of stable prices. So, in an era where oil demand growth is receding and production growth is plentiful, the oil market may need to identify only the most competitive producers. Price is generally a very effective tool for this purpose.

Content (Main) (right)

Tag

Oil Intel

Saudis are at risk of trapping themselves into suboptimal production targets

Post China’s reopening, early signals indicate that the increase in oil demand may not meet the predictions made by OPEC and other agencies. If the rise in demand significantly falls short of 1 million barrels per day (Mbd), compared to the anticipated 1.5+ Mbd, then Saudi Arabia’s independent rebalancing efforts could turn out to be suboptimal.

Saudi Arabia perceives the current oil balances as temporary, expecting that strong demand growth will eventually result in a market shortage that only OPEC’s spare capacity can remedy. However, if non-OPEC production growth persistently surprises Saudi Arabia during a period of stalling demand growth, the nation, which has set a goal to boost its production from 9 Mbd to 13 Mbd within the next 3 to 5 years, could face a dilemma. It might be forced to choose between maintaining stable prices at current levels without reaching production targets, or achieving production targets but causing prices to drop to levels that would deter less competitive producers.

Saudi Arabia appears to maintain the belief that oil demand will correlate well with GDP and population growth, attributing any supply/demand weakness to cyclical factors. However, if this belief proves to be too optimistic and other more structural factors such as decarbonization and plateauing growth in China are influencing the situation, then Saudi Arabia’s production ambitions might only be realized through a strategy driven by market share.

It’s also worth noting that in the current market context, with Brent crude trading around $75 per barrel, every producer worldwide is satisfied with their earnings and would gladly accelerate production growth given the prospect of stable prices. So, in an era where oil demand growth is receding and production growth is plentiful, the oil market may need to identify only the most competitive producers. Price is generally a very effective tool for this purpose.

Enter your email Address

Oil Intel

Saudis are at risk of trapping themselves into suboptimal production targets

Disclaimer