Saudis see need for major supply cut amid fears of glut

Saudi Arabia will reduce oil supply next month in response to lower demand, and more cuts could follow next year. Speaking at a conference in Abu Dhabi, Saudi energy minister Khalid Al Falih said the kingdom’s oil output would fall by 500,000 barrels per day in December.

Members of the Organization of Petroleum Exporting Countries (OPEC) and its allies could reduce supply further next year if needed, he added. OPEC and Russia added almost 2 MMbpd to the market between May and October, according to data compiled by Bloomberg.

“The consensus among all members is that we need to do whatever it takes to balance the market,” Al Falih said. “If that means trimming supply by a million [barrels per day], we will do it. Yet Saudi Arabia still has work to do persuading other major producers notably Russia, the largest non-OPEC nation in the alliance to agree to curbs.

President Donald Trump said he didn’t want to see more output cuts. “Oil prices should be much lower based on supply!” the president tweeted. U.S. crude prices fell for the 11th consecutive session, the most on record since the contract began trading, retreating from a rally early in the session as U.S.

The kingdom will reduce shipments by about half that amount next month, making its second policy U-turn after a summer surge in prices was followed by a swift collapse into a bear market this month. President Donald Trump said he hoped there would be no oil output reductions.

Trump’s comment followed remarks from Saudi Arabia’s energy minister saying OPEC was considering cutting supply next year, citing softening demand. The largest producer in OPEC is once again taking the lead to address huge shifts in the market.

In June, it persuaded fellow producers to end 18 months of production cuts and pump more crude in response to falling output in Venezuela and Iran and pressure over prices from U.S. President Donald Trump. Saudi Arabia has expressed concerns that U.S. sanctions have removed less oil from the market than expected.

Global oil prices tumbled into a bear market last week, down more than 20% from their recent peak. Fear of a global economic slowdown and a decision by the United States to allow some countries to keep buying Iranian crude oil following the reintroduction of sanctions have hit market sentiment.

“Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!” BP (BP) CEO Bob Dudley said the Saudi cut represented “quite a bit of oil. “That probably would adjust sentiment and get [prices] back into a corridor with less volatility,” he told CNN Business.

Venezuelan Energy Minister Manuel Quevedo told reporters it might be worth discussing cuts to address rising oil inventories. Oman’s Oil Minister Mohammed Al-Rumhy said “there is a consensus that there is an oversupply and we need to do something.

“We are going to do everything we can to keep inventories and supply/demand fundamentals within a reasonably narrow band around balance, and we believe markets will calm down,” Al-Falih said in a speech at an industry event in Abu Dhabi.

”A meeting between Novak, Al-Falih and other producers on Sunday yielded no formal change in supply policy, but did acknowledge they may need “new strategies. I would not want to focus purely on production cuts,” Russian Energy Minister Alexander Novak said in a Bloomberg television interview.

“We have to wait and see how the market is unfolding.The announcement of at least Saudi Arabia reducing probably will firm the price,” BP Chief Executive Officer Bob Dudley said in a Bloomberg television interview.

A senior OPEC source said the cartel and other major producers are discussing cutting production by as much as 1.2 million barrels per day. Producers need to cut about 1 MMbpd from October production levels, Saudi Energy Minister Khalid Al-Falih said in Abu Dhabi on Monday.A decision could be taken at the next OPEC meeting in Vienna on December 6.

A cut of that magnitude would reverse a decision in June by OPEC and Russia to pump over a million barrels per day more to make up for the expected loss of Iranian exports. “The size of any potential cut will depend on how much oil demand growth slows down, how much Iranian supply falls due to US sanctions, and how fast US supply rises,” said Giovanni Staunovo, an analyst at UBS.

Russia appears to need more convincing that it should be cutting production. Russia’s energy minister Alexander Novak said in Abu Dhabi on Sunday it was too early to make a decision to reverse course and cut supply.

“We’re going to do everything we can to keep supply and demand inventories within a reasonably narrow band, ” Al Falih said on Monday, during a debate moderated by CNN Business’ Emerging Markets Editor John Defterios. “We hope that markets will calm down.”

Crude prices jumped by as much as 2% on the prospects of reduced supply from OPEC. US crude oil futures were trading around $60.80 per barrel, $1.50 higher than on Friday.

The United States last week said eight jurisdictions China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey would be able to continue buying Iranian oil for six months without fear of US penalties under sanctions on trading with Iran.

“The sanctions on Iran have turned out to be a damp squib for the time being with the Trump administration granting exemptions,” said Devesh Mamtani, head of investments and advisory at Century Financial, a brokerage firm in Dubai.

“The exemptions have even surprised Saudi Arabia as oil supplies from Iran are likely to spike in the coming days,” he added. UAE energy minister Suhail Al Mazrouei, who is also OPEC president, said the cartel wouldn’t allow the market to become oversupplied.

“We will assure you that when we meet in December we will go to the market with the solution that will ensure market stability,” he said. “It all comes down to Russia,” said Helima Croft, chief commodities strategist at RBC Capital Market LLC. “They seem to be sitting squarely on the fence about pulling the bbl back.”

 

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